Flawed Predatory Lending Bill, with Preemption Provision, Nears House Floor

by Deepak Gupta

As law professor and guest-blogger Alan White explained in a post here last week, Barney Frank's new predatory lending bill -- H.R. 3915, known as the "Mortgage Reform and Anti-Predatory Lending Act of 2007" -- is not nearly as pro-consumer as its title suggests.  In fact, the bill contains a terrible provision that would preempt state-law liability and, as currently drafted, would immunize most subprime mortgage assignees from any liability at all.

The latest word is that Rep. Frank is working on a new version of the bill and other members have until 10:00 am EST tomorrow (Wednesday) to submit amendments.  The bill will go to the full House of Representatives on Thursday.  The consumer groups following the bill remain concerned that it is weak and may actually do more harm than good for consumers. The mortgage industry is lobbying very heavily to weaken the good parts of the bill and make the preemption more devastating.   Those who are concerned and want to express their views can call Congress at (202) 224-3121 or go to House.gov for the email or direct phone number of their representative.

An up-to-date analysis of the bill by Alys Cohen and Margot Saunders of the National Consumer Law Center is attached.  Here's an excerpt:

What if all trade associations told the truth?

"The Predatory Lending Association (PLA) is dedicated to extracting maximum profit from the working poor by increasing payday loan fees and debt traps. The working poor is an exciting, fast growing demographic that includes: military personnel, most minorities, and a growing percentage of the middle class."  Check out their website here!

CL&P Blog is at genius level

by Richard Alderman

I am not sure what it means, but the readability of our blog has been rated as "genius." I have never found the language used in the posts on this blog to be difficult to follow, and that is a comment on the blog, not my intelligence. Of course, readability does not relate to content, which we already knews was at the genius level. For the rating of several other sites, click here. To visit the site that does the ranking, and input any other blog, click here.

Third Circuit Issues CAFA Decision

Yesterday, the Third Circuit issued a decision concerning the Class Action Fairness Act in Frederico v. Home Depot, No. 06-2266, __ F.3d __, 2007 WL 3310553 (Nov. 9, 2007). In Frederico, the plaintiff argued that certain fees imposed by Home Depot for the alleged late return of its rental trucks violated New Jersey law. The CAFA questions were whether the putative plaintiff class sought more than $5 million - - the amount necessary under 28 U.S.C. 1332(d)(2) to establish federal jurisdiction - - and what the standard is for proving the jurisdictional amount when, as in Frederico, the complaint does not explicitly limit the amount being sought to $5 million or less.

On the latter question, to make a long story short, here's what the court held: "[W]here the plaintiff has not specifically averred in the complaint that the amount in controversy is less than the jurisdictional minimum[,] the case must be remanded [only] if it appears to a legal certainty that the plaintiff cannot recover the jurisdictional amount."  Slip op. 18. The court distinguished its ruling from its prior decision in Morgan v. Gay, 471 F.3d 469 (3d Cir. 2006), where the complaint had expressly limited the value of the claim to $5 million. There, "the proponent of the federal subject matter jurisdiction [generally, in CAFA cases, the removing defendant] is held to a higher burden; that is, the proponent of jurisdiction must show, to a legal certainty, that the amount in controversy exceeds the statutory threshold."  Slip op. 15.  [We have previously blogged about that ruling in Morgan v. Gay here, and another ruling in Morgan v. Gay, concerning CAFA's appeal filing deadline, here.]

For what it's worth, the court then found that there was way more than $5 million in controversy, id. at 18-24, and affirmed dismissal on the merits, holding that the plaintiff had not stated a claim under New Jersey law. Id. 25-38. It appears that the class was never certified and that therefore only the named plaintiff and not the (putative) class is bound by the court's ruling on the merits.

Looking Into the Foreclosure Process

by Deepak Gupta

The media and policymakers have been paying lots of attention lately to the plight of homeowners facing foreclosure. Most of that attention has been on preventing foreclosures from being initiated in the first place, and rightly so.  But it's also worth considering what happens in the foreclosure process itself: What kinds of notice and opportunity to contest the proceedings do homeowners get, what kinds of fees are they being charged, and how accurate are the claimed debts?

Fees and Overstated Claims:  A front-page article in the New York Times earlier this week reported on new research by University of Iowa law professor Katie Porter concerning exorbitant collection fees and overstated claims in mortgage foreclosure cases. The various fees charged to consumers facing foreclosure (late fees, "demand" fees, overnight delivery fees, fax fees, payoff statement charges, etc.) represent a substantial and growing percentage of the profits reaped by loan servicers. Porter's research--which is based on an examination of the actual behavior of mortgage companies in a set of 1,700 consumer bankruptcy cases--will be published in a forthcoming law review article entitled Misbehavior and Mistake in Bankruptcy Mortgage Claims (SSRN).

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.  Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question. . . . .

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

Notice Procedures:  Next, consider the adequacy of foreclosure notice procedures--an issue that Public Citizen is currently litigating in the Maryland Court of Appeals (Griffin v. Bierman) and the Michigan Supreme Court (Sidun v. Wayne Co.), building on a due process challenge we won in the U.S. Supreme Court last year (Jones v. Flowers). 

If you owe me a small amount of money and I want to sue you to get a judgment and collect on the debt, I've got to make sure you learn about the lawsuit.  I've got to get a process server to track you down and give you notice.  But if I'm a mortgage lender and I want to foreclose on your home--a case in which the stakes are obviously much higher--in some states I'm entitled to give you as little as ten days notice by mail, after which I can sell your house at auction without you even knowing about it.  That's what happened to Maryland resident Joyce Griffin. She lost her house in a foreclosure sale because she never received notice until it was too late for her to save her home.

Katherine Porter on the Credit Industry's Business Model for Postbankruptcy Lending

Katherine Porter of Iowa and the Credit Slips Blog has an article forthcoming in the Iowa law Review, Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending.  Here's the abstract:

Consumer credit and consumer bankruptcy filings have grown rapidly over the last two decades, and several researchers have attempted to understand the relationship between these two intertwined features of the modern American economy. Teasing out causation is almost impossible, as consumer advocates lay blame on the industry and the industry responds by citing the same data to show consumer misbehavior. Using a novel vantage point, this analysis examines what the credit industry's behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy. The empirical evidence on postbankruptcy credit solicitation belies the industry's characterizations of bankrupt families as opportunistic or strategic actors. Original data from longitudinal interviews with consumer debtors show that many lenders target recent bankrupts, sending these families repeated offers for unsecured and secured loans. The modern credit industry sees bankrupt families as lucrative targets for high-yield lending, a reality that has important implications for developing optimal consumer credit policy and bankruptcy law.

You can download the article at http://ssrn.com/abstract=1004276

In Australian Gold Case, Court Protects Consumers from Low Prices

by Greg Beck

The Eastern District of New York's recent decision in S&L Vitamins v. Australian Gold is another troubling case for consumers who shop online. The case involves one of a series of claims by Australian Gold, which makes tanning lotions, against those who sell its products for discounted prices on the Internet. Australian Gold sells its lotions to distributors, who contractually promise to resell the products only to retailers that offer a "salon environment." According to Australian Gold, this contract term is designed to ensure that retailers receive adequate training on how to use the products. Although I can't say whether Australian Gold's tanning lotion really requires a lot of training to use, a more likely explanation for the provision comes from the fact that the company's products are sold by third parties on the Internet at prices far below the prices available at salons. By cutting out low-priced Web resellers, the company can keep its products priced at a level that the market could not otherwise support.

S&L Vitamins bypassed Australian Gold's business model by purchasing the lotions from salons in bulk and reselling it online at half the retail price. Australian Gold claimed that S&L's conduct gave rise to several causes of action, including copyright and trademark infringement, unfair competition, tortious interference with contract, and false advertising.

Nancy Nord Responds

Acting Consumer Product Safety Commission chair Nancy Nord responds to criticisms of her agency and of travel that she and her predecessor took paid for by industry in this letter to the editor in today's Washington Post. Decide for yourselves whether Nord adequately defends the industry-paid travel. Nord also challenged one factual statement that has appeared in the Post.  She says that "the assertion that the agency has only one toy inspector is just flat-out wrong" and that the Post's statement in that regard is an "insult" to the CPSC.

NHTSA Safety Recalls for October 2007

The National Highway Traffic Safety Administration has issued its vehicle recall report for October 2007.

Frank bill lets Wall Street off the hook

by Alan White
Assistant Professor, Valparaiso U. School of Law

   Many thanks to Deepak for inviting me to post here. I'd like to begin with a note about the serious flaws in HR 3915, the predatory lending bill introduced by Barney Frank recently. Yesterday's New York Times editorial alluded to the bill's shortcomings. There has also been some false advertising on the part of the sponsors, who claim that "securitizers" will be liable for violations. This poorly-defined term simply camouflages the fact that the bill immunizes most subprime mortgage assignees from any liability. Consumers with loans from bankrupt lenders will be out of luck.

The bill would require mortgage originators to make a reasonable determination of repayment ability, and prohibit making loans without a tangible net benefit to the borrower. So far so good. However, the bill also bars any liability for "pools of loans" or "securitization vehicles". The critical language is buried in proposed Section 129B(d)(9). For most subprime mortgages, trusts, which are nothing more than pools of mortgage loans, are the entities that are the legal owners of the mortgage, and the only entity with any assets or ability to provide consumer redress. This is particularly true when the original lender has filed bankruptcy, as in the case of New Century and countless others.