Consumer Law & Policy Blog

Times Articles on Mortgage Regulation, Privacy, and Marketing

by Jeff Sovern

Here is the article in today's Times on the new Fed rules that Alan blogged about yesterday.  Saturday's edition noted in "By Large Margin, Senate Votes to Help Homeowners and Overhaul Loan Agencies" that the Senate had approved the bill intended to help borrowers avoid foreclosure.  The bill now returns to the House.  Sunday's issue included "The Silence of the Lenders," which tells the story of the email Angelo R. Mozillo, Countrywide's chief executive called "[d]isgusting."  The email was from a borrower, Dan A. Bailey, Jr., and sought a loan modification that would permit him to keep his home.  As the headline implies, the article is about how borrowers are having difficulties getting the attention of loan servicers. Excerpts:

* * * As of the most recent quarter, 2.67 percent of the loans that Countrywide services were more than 90 days delinquent. (The Bank of America Corporation acquired Countrywide on July 1 and is now overseeing the Countrywide portfolio.)

Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies’ operations weren’t set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans.

* * *

That said, foreclosures are vastly outnumbering loan workouts today, a year and a half after the subprime mortgage debacle began creeping into the headlines. In May, for example, even as Hope Now conducted 70,000 loan modifications, an estimated 85,000 families lost their homes to foreclosure. That same month, 276,000 loans either entered or completed foreclosure.

Fed Tightens Subprime Mortgage Rules

By Alan White

While I haven't digested the full rule, it seems that the Fed's final unfair mortgage practices rule (press release with link to Federal Register text) is stricter than initially proposed in at least two key areas. The proposed rule would have prohibited subprime mortgage loans made without regard to repayment ability, but lenders would have faced liability only if their conduct constituted a pattern or practice. The final rule drops the pattern or practice requirement, and requires the lender to evaluate the borrower's ability to make the highest payment scheduled during the first seven years of the mortgage.

The proposed rule had very limited consumer protections regarding prepayment penalties. The final rule will bar prepayment penalties for any loan that permits any change in the scheduled payment during the first four years, and limits prepayment penalties for all subprime loans to the first two years of the loan.

Other aspects of the proposed rule were withdrawn, and generally speaking the message from the Fed seems to be that if and when a subprime mortgage market re-emerges in the U.S. it will be a much more strictly regulated market. Expect industry commentary to be unfavorable, if not apocalyptic.

Looming Alt-A Bank Failure

By Alan White

IndyMac Bancorp is a bit like Northern Rock, the UK bank that was nationalized a few months ago. Unlike many leading mortgage lenders, it is an actual bank with actual depositors, whose deposits are insured by the FDIC. Unlike the large national bank holding companies who participated in the subprime frenzy, like Wells Fargo and Citigroup, IndyMac had a relatively small deposit base and relied on brokered deposits and aggresive marketing of CDs to raise capital. For those banking law geeks who remember the savings and loan crisis of the 1980s, these are familiar. Brokered deposits are deposits obtained from outside the bank's service area, attracted by above-market interest rates. Paying these higher rates squeezes the bank's yield spread, and more importantly, brokered deposits are short-term and can evaporate quickly when a bank gets in trouble.

IndyMac was not really a subprime lender; it specialized more in Alt-A loans, which had interest rates more akin to prime mortgages, but were either jumbo loans, no-doc loans, interest-only loans or some combination of these. The Alt-A portion of the mortgage market grew at an astonishing rate to become a major sector in 2006 and 2007, and represents the next wave of defaults and foreclosures.

IndyMac's stock has plummetted over the past 12 months as a result of the steady increase in mortgage defaults and the general unease about the mortgage market, and the company now trades at less than $1 per share. Its capital has eroded to well below required levels, and it has now fallen victim to a classic run on the bank. Depositors are lining up daily and the bank is rapidly losing cash. The Implode-o-Meter declared it imploded as of about a week ago.

California Foreclosure Law Passed

California has joined New York in passing legislation (full text of bill here) to address the foreclosure crisis. The thrust of the law is to require mortgage servicers to exhaust all avenues in order to contact borrowers and negotiate modified terms before foreclosing. It also provides limited protections for tenants affected by landlords' foreclosures and imposes duties on foreclosing servicers to maintain properties. Similar legislation has been proposed in a number of other states.

Fed to Announce Mortgage Rule Monday

The Federal Reserve will announce its final unfair mortgage practices rule at an unusual public meeting on July 14. The proposed rule would regulate subprime mortgages by requiring reasonable income verification and prohibiting a pattern and practice of making loans without regard to repayment ability, mandating escrows for tax and insurance payments, and placing very modest restrictions on prepayment penalties.

There has been growing concern among consumer advocates that the Fed will yield to pressure from the industry to water down the rule, particularly by weakening the repayment ability requirements and by carving out parts of the subprime market from the rule's coverage.

For the Fed to consider substantive regulation of unfair and deceptive practices represents a dramatic change in the culture of deregulation and cheerleading for the "democratization of credit", albeit a change prompted by a credit crisis of historical proportions. It remains to be seen whether the Fed will have the courage of its (new) convictions.

[oops - missed seeing Jeff's earlier post on this]

Times Articles on Credit Card Law Reform, Online Privacy, and New York's Foreclosure Legislation

The weekend's consumer law harvest from the Times:

The Times reported on Saturday that Credit Card Overhauls Seem Likely.  The entire article is worth reading, but here's an excerpt:

Working with the Office of Thrift Supervision and the National Credit Union Administration, the Federal Reserve introduced its proposals in early May. It has asked for comments and expects to formalize proposals by the end of the year.

At the same time, the legislation most likely to succeed in both the House and Senate sets similar rules on consumers’ behalf. Representative Carolyn B. Maloney, the Democrat of New York who wrote the House bill, and Senator Christopher J. Dodd, the Democrat of Connecticut behind the Senate measure, said they planned to bring their measures to the floor for votes before Congress adjourns in September.

The House and Senate bills as well as the Federal Reserve require that lenders apply payments to the debt with the highest interest rate. All would ban “double cycle” billing, in which interest is charged on some already repaid debt, and all would extend the time required, currently 14 days, between a statement mailing and payment due date.

All the measures would, under various conditions, prohibit lenders from raising interest rates on existing debt. The central bank proposes that except for increases caused by changes in stated variable and introductory offers, lenders may increase interest rates only if minimum payments are more than 30 days late.

Only the Dodd bill prohibits charges for paying by mail, phone or online, and restricts marketing and offers of credit to consumers under 21.

Friday's edition included Google Told to Turn Over User Data of YouTube, about a decision that has privacy advocates concerned.  An excerpt:

For every video on YouTube, the judge required Google to turn over to Viacom the login name of every user who had watched it, and the address of their computer, known as an I.P. or Internet protocol address.

Both companies have argued that I.P. addresses alone cannot be used to unmask the identities of individuals with certainty. But in many cases, technology experts and others have been able to link I.P. addresses to individuals using other records of their online activities.

The amount of data covered by the order is staggering, as it includes every video watched on YouTube since its founding in 2005. In April alone, 82 million people in the United States watched 4.1 billion clips there, according to comScore. Some experts say virtually every Internet user has visited YouTube.

And on Sunday Bob Tedeschi had a column, Mortgage Brokers as Naysayers, about the new New York foreclosure legislation, passed by the legislature, but not signed by the Governor, at least as of the time Tedeschi's piece went to press--though the article states that the Governor is expected to sign it into law [I should note that last week I posted that the bill had been enacted by the legislature, which was premature].  More excerpts:

* * * [The bill provides] that brokers have a “duty of care” to offer appropriate loans to subprime borrowers — those with poor credit.

Brokers are asking, however, what constitutes an appropriate loan, and what happens if a borrower disagrees with a broker’s recommendation.

* * *

* * * Mr. Tricozzi[, president of the New York Association of Mortgage Brokers] said, the legislation requires brokers to weigh a borrower’s future earnings in selecting appropriate loans. For some borrowers, like pregnant women or workers nearing retirement, such prognostications might be unreliable. Yet refusal to offer loans to such borrowers could be construed as age or gender discrimination, he said.

* * *

* * * some advocates want to hold mortgage brokers to the same legal standard as stockbrokers and other financial advisers, who carry a fiduciary duty to act in their clients’ best interests and offer only “suitable” financial products. New York’s proposed law specifically stops short of the suitability standard, said Richard H. Neiman, New York’s banking superintendent.

Times Articles on Foreclosure Issues, Mortgage Fees, and College Loans

Here are links to a few articles from the Times on consumer law issues from June that I've been stockpiling:

From June 22, Bob Tedeschi's Mortgages Column, "A Close Look at All Those Fees," is about how little consumers know about the fees charged in obtaining mortgages, and which fees can be negotiated.  An excerpt:

A recent survey, done by the Center for Economic and Entrepreneurial Literacy, a Washington-based research center, asked 1,000 people in April to choose the four most relevant factors in obtaining a mortgage. Nearly 70 percent did not identify their credit score, which chiefly determines the borrower’s loan eligibility and interest rate.

* * *

Another recent study . . . by the Urban Institute, also based in Washington, found that borrowers living in an area full of college-educated homeowners paid about $1,100 less in mortgage fees than those in areas where few people attended college. The study noted racial differences as well: on average, African-American borrowers paid $415 more for their loans than white counterparts did, while Latinos paid $365 more.

I wonder if there's an ECOA violation in the different fees charged different groups.

Some New York news: On June 19, the Times ran a piece, "Court Offers Homeowners Help Avoiding Foreclosure," on a program announced by New York's Chief Judge Kaye about a new court section that will help "borrowers and lenders reach speedy settlements."  New York's legislature also just passed a bill to help homeowners, and the Governor is expected to sign it.  Back on June 1, Tedeschi did another piece, "Legal Help in Face of Foreclosure," about local efforts to establish a Nassau County program under which lawyers will be trained and provide help to consumers facing foreclosure on a pro bono basis.

On June 18, the Times published "Bill Promotes Universal College Loans."  An excerpt:

Under the proposal, lenders that participate in the federal loan program would have to extend credit to any eligible student, regardless of such things as income or the number of years of education, as long as the college is part of the program.

Perhaps the refusal to lend to students at particular schools would create ECOA issues, depending on the demographics of the student body.  In any event, it's not clear to me what effect such a bill, if enacted, would have on higher education.  If lenders would rather not lend to students at certain schools because, for example, students at those schools are unable to get jobs and so default on their loans, would forcing the lenders to continue making such loans keep the schools afloat and students attending them--only to discover that they can't get jobs later?  Or is the refusal of lenders to make loans not because of higher default rates?  Would such a law increase student loan rates generally?  Or does the federal loan program guarantee keep rates low regardless of the default rate?   

The Other Foreclosure Crisis

If you think the foreclosure crisis is about greedy home buyers stretching to buy a fancy house in California, you should read this article in the current issue of the Nation. It is one of the best accounts I have seen thus far of the huge loss of wealth in the African-American community.

Times Editorial on the Need for Congressional Action in the Foreclosure Crisis

The Times editorializes here in today's paper about the importance of Congressional action on the foreclosure crisis.  Some excerpts:

By the time the Senate returns next Monday from its July 4 recess, some 55,000 more homes will have entered foreclosure. And that’s hardly the full picture of the growing calamity. More than three million homeowners are currently at risk of default and millions more are expected to join them in the coming year as home prices drop, the economy falters and delinquencies rise. Yet the Senate went ahead with its vacation last Friday without passing a foreclosure prevention measure.

* * *

The foreclosure prevention bill is not a cure-all, by any means, but is a way to try to break the cycle. It would allow many troubled borrowers to exchange their unaffordable loans for new mortgages guaranteed by the federal government — as long as the lender agreed to reduce the existing loan balance to 85 percent of the home’s current value. It is questionable whether lenders would be willing to take the loss, and there’s nothing in the law to prod them to do so.

Still, the bill’s passage, which should be the Senate’s priority next week, would be an overdue acknowledgment that the foreclosure mess requires government intervention. Lawmakers could build on the effort as needed, but it is unconscionable not to take the first step.

Times Reports that New Housing Bill Will Help Only a Fraction of Borrowers in Distress

  Today's Times reports in "As Housing Bill Evolves, Crisis Grows Deeper," that the bill making its way through Congress will help only about 400,000 of the millions of borrowers in distress.  Some excerpts:

“It’s not enough, even in the best of circumstances,” said Mark Zandi, chief economist of Moody’s Economy.com. The number of people who will be helped “is going to be overwhelmed by the three million that are headed toward default.”

* * *

The effectiveness of the bill will depend to some extent on how it is handled by the F.H.A., an agency created during the Great Depression to insure home loans. It will have several challenges: persuading the lenders who made second mortgages and home equity loans to cooperate; screening loans to make sure borrowers have a good shot at keeping their homes after refinancing; and weeding out those trying to take advantage of the system.