Consumer Law & Policy Blog

Home Foreclosure Rate Hits 50-Year High

The Washington Post reports here this morning that, according to none other than the Mortgage Bankers Association, the percentage of home mortgage foreclosures in the first three months of this year hit a 50-year high.  As the Post article explains, this tragic problem is most acute in the sub-prime market:

The most dramatic fallout took place in the subprime market, which caters to people with blemished credit or other factors that make them a risk to lenders.  Those borrowers entered foreclosure at a rate of 2.43 percent, up from 2 percent the previous quarter.

The Post story goes into considerable detail on the issue, discussing, among other things, the connection between the popularity of adjustable rate mortgages and the increasing foreclosure rate.  The Wall Street Journal reports the same story, and notes that the Mortgage Bankers Association's chief economist predicts that the foreclosure rate will continue to rise into next year.

NCLC/NACA Debt Collection Comments to FTC

The National Consumer Law Center and the National Association of Consumer Advocates submitted extensive comments last week on debt collection practices to the Federal Trade Commission, including an appendix describing 34 examples in 17 states of abusive practices. The FTC solicited comments in anticipation of a workshop it is having in the fall on the 30^th anniversary of the Fair Debt Collection Practices Act. The FTC is still soliciting original research papers, which are due September 7.

NCLC and NACA described widespread problems including abusive lending practices; growth of the debt buyer industry and sale of debt from one collector to the next; abuse of the courts; mandatory arbitration; abuse of electronic collection methods; and persistence of unlawful harassment, phone calls and threats prohibited by the original 1977 Act.

The Comments proposed a prohibition on debt collection activity unless the collector possesses basic information to verify the debt and to resolve disputes; stronger protection from unfettered electronic access to consumer accounts; disclosure that a debt is time-barred; reforms against creditors including payday lenders, mortgage servicers, and banks that freeze exempt funds; and amendments to strengthen the protections and remedies of the FDCPA.

The comments are available here.   The FTC site to comment is here.

Debt Collectors and Answering Machines

by Jeff Sovern

My co-blogger, Deepak Gupta has previously blogged about the FTC's request for comments on debt collection in preparation for a workshop it plans to hold in October.  Today is the deadline for submitting comments,  though the Commission is willing to receive original research, surveys, and academic papers until September 7.  I submitted a comment earlier today (the number assigned my submission suggests only fifteen had been received to that point, though perhaps many last-minute statements have since been or will be filed).  The FTC will make the comments available on its website and in fact seven statements received in April and May have already been posted there.  The following excerpt from my comment deals with debt collectors who, when attempting to telephone a consumer, instead reach an answering machine: 

The FDCPA was enacted in 1977, when telephone answering machines were not yet common, and so the drafters of the statute understandably did not anticipate all the consequences of that technology.  In the intervening decades, answering machines and voice mail have, of course, become omnipresent.  Answering machines present a dilemma for debt collectors.  Debt collectors who repeatedly reach an answering machine and respond by hanging up without leaving a message risk violating § 806, 15 U.S.C. § 1692d, barring harassment, and particularly subsection (5) of that provision (“Causing a telephone to ring . . . repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number.”) and subsection (6) (prohibiting “the placement of telephone calls without meaningful disclosure of the caller’s identity”).

Sixth Circuit Reverses Dismissal of Claim Alleging That Discover Card's Harassing Collection Activity Led to Cardholder's Suicide

by Brian Wolfman

Anyone interested in the potential human costs of debt collection harassment should read the Sixth Circuit's recent decision in MacDermid v. Discover Financial Services, No. 06-5792 (May 29, 2007).  The complaint in the case alleged that the plaintiff's wife, who suffered from bipolar disorder, committed suicide because of Discover's harassment of the couple over $15,000 in credit card debt.  The district court dismissed most of the claims on the pleadings and two claims at the summary judgment stage.  The Sixth Circuit reversed the dismissal of the claim that Discover had intentionally inflicted emotional distress or engaged in "outrageous conduct" in violation of Tennessee common law.  The court of appeals ruled that the plaintiff at least stated a claim for outrageous conduct based on Discover's threats of criminal prosecution for the failure of the plaintiff and his wife to pay a purely civil debt.  The court affirmed the dismissal of various claims under Tennessee law (including a wrongful death claim) and the federal Truth in Lending Act and Fair Debt Collection Practices Act.  The facts alleged - - including the wife's heart-wrenching suicide note - - are stated in detail at the beginning of the opinion.

Credit Card Debt in the U.S.: An Ill-Fated Love Affair

By Brian Wolfman

Today's Washington Post contains a major article by Kathleen Day, entitled "A Highly Charged Relationship," about Americans' love for credit cards, but their vehement dislike for some of the credit card companies' practices -- practices hidden in the fine print until they spring into action.  As Day puts it, "Call it a love affair with a dark side."  Consumer complaints to federal banking regulators are about credit card companies more often than anything else.  The third paragraph of the article gives you a sense of what the article is about:

The avalanche of gripes generally boils down to objections about a half-dozen practices, according to congressional staff and consumer groups. The complaints mostly center on what consumers see as unfairly high interest rates and penalty fees; confusing policies that constantly change, almost always in the lender's favor; and near-insurmountable hurdles to getting help when a consumer falls into trouble or when a company makes a billing mistake.

After the main article, the Post includes a series of vignettes -- under the title "Mad About Credit Card Companies" -- featuring real consumers who felt victimized by various credit card practices.  Read about "over limit" fees and penalties; interest charges on the whole debt even when part of it has been paid; flat-out company billing errors (in the case discussed, Capital One harassed a dad mourning the death of a son who had left a debt of $217 -- Capital One erroneously insisted that the debt was more than 6 times greater); refusal to work with credit counselors who are trying to help the card holder; "workout plans" that don't reduce the consumer's debt; and "due dates" on days when it is literally or effectively impossible to make payment (here, the consumer paid in person at the bank on Saturday, in advance of the Sunday due date -- a date on which it was impossible to pay -- but since Saturday payments are not credited until the next business day, the consumer got hit with a late charge).

Payday Loan Store Manager Speaks Out

by Christopher Peterson

The Center for Responsible Lending recently posted a chilling four minute video with Rebecca Flippo, a former payday loan store manager from Virginia. Ms. Flippo explains that the effect of payday lending on low income consumers is "worse than you think." Her comments give a sense of how some borrowers may end up trapped in long term obligations.

Particularly interesting were her comments suggesting that many of her customers mistakenly believed that their loans were cheaper than credit cards. Apparently, her company had a policy of "playing down" the significance of their high annual percentage rates, even though most borrowers ended up with longer term obligations.

Fourth Circuit: No common-law litigation immunities under FDCPA for debt-collection law firms.

by David Arkush

David Arkush is a Fellow at Georgetown University Law Center's Appellate Litigation Program and a new contributor to the blog.

In a forceful opinion issued today, Sayyed v. Wolpoff & Abramson, No. 06-1458 (May 9, 2007), the Fourth Circuit rejected a debt-collection law firm’s argument that it enjoys common-law immunity from FDCPA claims that arise out of statements made in the course of litigation.

Farid Sayyed alleged in federal district court that the law firm Wolpoff & Abramson (W & A) had filed, in a state-court debt-collection action, interrogatories and a summary judgment motion that contained false statements. W & A argued that it was absolutely immune from FDCPA claims arising from statements made in litigation, and the district court agreed and dismissed.

The Fourth Circuit reversed.  First, it concluded broadly that "The statutory text makes clear that there is no blanket common law litigation immunity from the requirements of the FDCPA." It is settled law that FDCPA covers attorneys, the court noted, and FDCPA’s exception for formal pleadings in a legal action—that they need not disclose that they are from a debt collector—illustrates that such pleadings are subject to all other FDCPA requirements.  Otherwise, there would be no need for an exception.

The court also addressed the more specific arguments that (1) FDCPA liability cannot attach to communications made to a debtor’s counsel, and (2) because common-law immunities exist under 42 U.S.C. § 1983, they also exist under FDCPA. The court rejected the first argument because it contradicts FDCPA’s expansive definition of a "communication" as "the conveying of information regarding a debt directly or indirectly to any person through any medium." More important, the court rejected the second argument by reasoning that recognizing common-law immunities under FDCPA would defeat the Act’s very purpose:

Congress meant not to incorporate common law immunities in this area, such as they may be, but to overwrite them, defining the scope of liability and immunity entirely by statute.

* * *
The FDCPA aims "to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses." 15 U.S.C. § 1692(e). Adopting the sweeping immunities urged by appellee would stop the statute in its tracks.

(The court also held that the district court erred when it concluded in the alternative that dismissal was proper because W & A asserted that it relied on representations of its client. The court held that the proper time for considering a § 1692k(c) bona fide error defense is at summary judgment, not on a 12(b)(6) motion.)

A Look At The Subprime Lending Industry

The Washington Post continues its coverage of subprime lending with this front-page expose on the pressure felt by employees at one subprime lender, New Century, to approve mortgage loans.  The following short excerpt from the Post article gives you a flavor for the story:

New Century has become the premier example of a group of companies that grew rapidly during the housing boom, selling working-class Americans with questionable credit huge numbers of "subprime" loans with "teaser" rates that typically rose after the first two years. This business transformed the once-tiny New Century into a lending powerhouse that was held up as a model of the mortgage industry's success.

But now, with home values falling and adjustable loan rates rising, record numbers of homeowners are failing to make their payments. And a detailed inquiry into the situation at New Century and other subprime lenders suggests that in the feeding frenzy for housing loans, basic quality controls were ignored in the mortgage business, while the big Wall Street investment banks that backed these firms looked the other way.

New Century, which filed for bankruptcy protection last month, has admitted that it underreported the number of bad loans it made in its financial reports for the first three quarters of 2006. Hardiman and other former employees of New Century interviewed said there was intense pressure from bosses to approve loans, even those with obviously inflated housing appraisals or exaggerated homeowner incomes.

Avoiding Foreclosure

   

Today's Washington Post has this lengthy article on strategies for mortgage lenders and borrowers to avoid foreclosure.  One premise of the article is that lenders are willing to work with borrowers because a restructured loan that the borrower can realistically afford is often a better financial deal for lenders than is foreclosure.

FTC Wants Comments on Collection of Consumer Debts

by Deepak Gupta

  The Federal Trade Commission is going to be holding a workshop this fall, on October 10-11, entitled Collecting Consumer Debts: The Challenges of Change.  As the title suggests, the FTC is mostly interested in learning about how changes in technology and society have affected debt collection.  They're looking for comments and papers on a list of topics, including legislative proposals.

Here's a link to a description of the workshop and a list of the specific questions on which the FTC is seeking comments.  They're looking for empirical data; I'm skeptical about how much of this information is really available.  There's very little published research using empirical data on the collection of consumer debts and although the industry presumably has a lot of data, their perspective isn't exactly neutral.  In any event, here are the general areas on which they're seeking comment:

• Demographic and industry information
• Industry information
• Debt collection practices and techniques
• Industry compliance with applicable federal and state laws
• Consumers' behavior and knowledge of their rights
• Legislative issues

Comments are due by June 6 and can be filed in paper form or online via this link.