Consumer Law & Policy Blog

"Predatory Structured Finance": Is it time for a new label within the lexicon of predatory lending?

by Christopher Peterson

Over the past five years commentators in the debate over subprime home mortgage lending have ironed out a standard list of practices and contract terms that serve as warning signs of "predatory lending." These terms and practices include high interest rates, high fees and closing costs, balloon payments, negative amortization, inflated appraisals, insurance packing, mandatory arbitration, unaffordable loans based on the value of collateral, rushed closings, multiple refinancing, abusive collection, prepayment penalties, and misleading or fraudulent disclosure. This list is both necessary and useful.

However, in a new article entitled "Predatory Structured Finance" (forthcoming in the Cardozo Law Review) I suggest that the concept of predatory lending has nevertheless been cast too narrowly.  In today’s subprime mortgage market, originators and brokers quickly assign home loans through a complex and opaque series of transactions involving as many as a dozen different strategically organized companies.  Loans are typically transferred into large pools, and then income from those loans is "structured" to appeal to different types of investors. 

The article includes a useful illustration (pictured above) of a typical subprime home mortgage securitization structure.  This process, usually referred to as securitization, can lower the cost of funds for lenders, allowing them to offer better prices.  But, it can also capitalize fly-by-night companies that specialize in fraud, deceptive practices, abusive collections, and other predatory behavior.  Some of the institutions that sponsor and administer securitization of mortgage backed securities are complicit in predatory lending.  By encouraging, facilitating, and profiting from predatory loans, these financiers have themselves slipped into predation. In addition to transferring liability to the secondary market through assignment based rules (such as the Federal Trade Commission’s holder-notice rule or the Home Ownership and Equity Protection Act’s assignee liability provisions), courts and policy makers should explore common law imputed liability theories such as civil conspiracy, aiding and abetting, and joint venture.  Unlike assignee liability rules, these older common law theories can reach architects of predatory structured finance that never actually own predatory loans themselves.

New Second Circuit Decision Protects Homeowners

by Brian Wolfman

    The Second Circuit today issued a major decision regarding the rights of homeowners whose homes are seized by local authorities for failure to pay taxes without giving the homeowners constitutionally adequate notice.

    In Lussenhop v. Clinton County, the Second Circuit did two important things.  First, the court held that the Tax Injunction Act, 28 U.S.C. 1341, does not bar a plaintiff from challenging in federal court  notice procedures employed by state and local governments prior to seizing tax delinquent property.  Second, in remanding the three cases before it to the district court, the court indicated that it would vigorously protect the notice rights established in Jones v. Flowers, 126 S. Ct. 1708 (2005).  Jones held that when the government knows that its initial notice that it plans to seize a home has not reached the homeowner, due process requires the government to take reasonable additional steps to notify the owner prior to the taking.  As the first major post-Jones ruling, the Lussenhop decision is definitely worth a read.

    [Disclosures: Michael Kirkpatrick and Deepak Gupta of my office, Public Citizen Litigation Group, filed an amicus brief in Lussenhop.  The Litigation Group also represented the homeowner in Jones v. Flowers.]

Important FDCPA Ruling: Brown v. Card Service Center

    By Brian Wolfman

    The Third Circuit has issued an important Fair Debt Collection Practices Act (FDCPA) decision in Brown v. Card Service Center , __ F.3d __,  2006 WL 2788476 (Sept. 29, 2006).  I should mention at the outset that the plaintiff's case was argued by CL&P Blog contributor, Cary Flitter.  Noted Philadelphia consumer lawyer David Searles served as Cary’s co-counsel.

    Brown begins with two key general holdings of a kind not seen too often these days.  First, the court noted that because the FDCPA is a remedial statute, it should be construed “broadly” to achieve its ambitious consumer protection purposes.  Second, because of the Act’s remedial purpose, whether a debt collector has engaged in deception or misrepresentation must be judged from the perspective of the “least sophisticated debtor,” not merely a “reasonable debtor.”  This standard has been adopted by many other courts, but it has come under attack in some quarters in recent years.  Congress’s point, the Third Circuit explained, was to protect naive, trusting, and even gullible consumers from unscrupulous debt collectors.  Now for a bit more detail . . . .

FDCPA Amendments

by Richard Alderman

Changes in the Fair Debt Collection Practices Act (FDCPA) have been approved by the U.S. Congress and sent to the President to sign into law. The amendments were part of the Financial Services Regulatory Relief bill, which was passed this weekend.

Some of the key changes include clarification around “mini-Miranda” disclosures and legal codification that allows agencies to collect during the 30-day validation period.

The mini-Miranda clarification comes in updating protocol for legal pleadings and other communications, such as IRS 1099-C (cancellation of debt) forms. One of the new amendments states, “A communication in the form of a formal pleading in a civil action shall not be treated as an initial communication.” Also, communications that do not seek the payment of a debt, like 1099-C forms or Gramm-Leach-Bliley Act privacy notices, will no longer be considered an initial communication and will not require mini-Mirandas.

The FDCPA was also specifically amended to allow for the collection of a debt during the 30-day violation period, unless the consumer has an active written dispute regarding the debt.

The new amendments also include a provision that certain bad check enforcement firms, such as companies that run pretrial diversion programs for bad check offenders, will not be legally defined as debt collectors for purposes of the FDCPA.

CL&P Roundup

by Deepak Gupta

• "Tort Deform": That’s the snappy and provocative title of a new blog on civil justice issues produced by the Drum Major Institute for Public Policy, a progressive think tank in New York. They’ve already assembled an impressive and interesting lineup of contributors (including CL&P co-bloggers Paul Bland and Brian Wolfman). Here’s their mission statement. Highlights so far include a piece on preemption by Alan Morrison; an item by Linda Andros on the junk food bill (on which Steve Gardner also posted here last week); and a discussion by the blog’s coordinator, Cyrus Dugger, on the book Distorting the Law.

• Victor Schwartz's Common Sense: Philosophers warn us to be wary of appeals to 'common sense'. In a recent Kansas Law Review article, Victor Schwartz presents his case for “Common-Sense Construction of Consumer Protection Acts.” Although he assures the reader that he's not advocating the complete “elimination of private rights of action,” Schwartz's proposal would come as close to that goal as might be thought politically feasible; the article bristles with hostlity to modern statutory consumer protection law and urges a return to common law principles. Schwartz advocates model legislation that would require proof of objectively reasonable reliance and actual injury, strict limitations on treble damages and awards of attorneys’ fees, a complete prohibition on class actions wherever statutory damages are available, modifications to statutes of limitations, and extreme restrictions on the circumstances under which class certification could be granted. As we discussed earlier in this post, Schwartz's article isn't mere theory; it's the blueprint for legislation that will soon be introduced in state legislatures across the country.

• Ban on Consumer Class Actions Held Unconscionable: Wading into the growing battle over the enforceability of class action bans in arbitration agreements, a California appellate court this week said DirecTV could not require its customers to give up their right to class actions and held that a waiver buried in a “bill stuffer” was both procedurally and substantively unconscionable. California's 2d District was not persuaded by DirecTV's argument that the possible amount of recovery could be as high as $1,000. While "$1,000 is not an insignificant sum, many consumers of services such as those offered by DirecTV may not view that amount as sufficient to warrant individual litigation.” The court explained that “the class action device remains, in our view, the only practicable way for consumers of services such as DirecTV's to deter and redress [such] wrongdoing.” The ruling builds on the California Supreme Court's landmark Discover Bank decision last year.

• Debt Collectors and Bankruptcy Filings: Elizabeth Warren suggests that last year’s bankruptcy legislation may have emboldened debt collectors to intimidate consumers out of filing for bankruptcy.

IRS Begins Outsourcing to Private Debt Collectors

by Deepak Gupta

Beginning this week, the Internal Revenue Service will begin assigning some delinquent federal tax accounts to private debt collectors.  Even if you set aside for a moment the questionable merits of privatizing a function like tax collection (the dangers include privacy and security breaches, collection abuses, and a new category of scam artists), the amazing thing about this program is that it's a demonstrable failure even on privatization's own terms.  As the Washington Post's top-notch consumer columnist Michelle Singletary reports, it's going to be much more expensive:

Isn't outsourcing supposed to save money? . . . I guess not, because our government is willing to pay private debt collectors 21 to 24 cents per dollar collected. That's compared with about the 3 cents on the dollar it would cost to have IRS employees do the job . . . Even IRS officials, including Commissioner Mark W. Everson, have acknowledged that agency employees are better collectors.

When Is the Repo Man A "Debt Collector"?

by Deepak Gupta

Today, a panel of the U.S. Court of Appeals for the Fifth Circuit weighed in on a significant Fair Debt Collection Practices Act issue that has divided the courts—the extent to which repossession and foreclosure companies and their attorneys are covered by the Act.  Perhaps surprisingly, the short precedential decision, written by conservative Judge Emilio Garza, decided this open question in favor of a pro se litigant who had lost his mobile home in a foreclosure action.  In this particular case, the consumer sued the finance company’s attorney, arguing that filing a judicial foreclosure action without first sending a collection letter was a violation of the Act.  But the issue decided by the Fifth Circuit is much broader; it implicates all of the FDCPA’s prohibitions on deceptive, harassing, and unfair practices.  The case is Kaltenbach v. Richards, No. 05-30132 (5th Cir. Sept. 11, 2006).