Consumer Law & Policy Blog

City of Baltimore Sues Wells Fargo Over Predatory and Discriminatory Mortgage Lending

by Brian Wolfman

Read this Baltimore Sun article about the City of Baltimore's suit alleging that Wells Fargo engaged in predatory and racially discriminatory lending against Baltimore citizens. Baltimore Mayor Sheila Dixon, pictured to the left, is behind the suit.

Baltimore claims that it reviewed foreclosure data and concluded that Wells Fargo was intentionally steering African-American Baltimoreans into subprime loans. Wells Fargo denies the allegations. The City alleges that it has been injured because it has been required to spend more social services funds on its citizens who have been victimized by Wells Fargo's allegedly unlawful conduct. I think you'll find the complaint very interesting. Note in particular page 34 of the complaint - - a full-color map of the city depicting the racial disparities alleged in the complaint. The New York Times has also covered the story.

Would the Close-Connectedness Doctrine Help Defrauded Subprime Borrowers?

Apparently one of the big problems for defrauded subprime borrowers who seek redress is that the mortgage originators are judgment-proof while transferees with the assets to satisfy a judgment are protected by the holder in due course doctrine.  But what about the close-connectedness doctrine?  Decades ago, before the FTC adopted its holder rule, and before state legislatures abolished the holder in due course doctrine in many consumer transactions, state courts created the close-connectedness doctrine to subject lenders to consumer defenses when the lender had a sufficiently close relationship to the entity that dealt directly with the consumer.   See, e.g., Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967).  The doctrine was sometimes cumbersome to work with--for one thing, it required proof of the requisite relationship--so it fell into disuse when the FTC promulgated its rule and legislatures enacted more helpful statutes, but so far as I know, it has never been overturned.  If borrowers can establish a similar relationship between securitizers and mortgage originators, could the borrowers get around the holder in due course status that way?  Is that something that borrowers are already trying to do?  I would be curious to read comments from those representing such borrowers.  Individual borrowers might be stymied by arbitration clauses barring class actions and the consequent need to litigate these loans one at a time, but perhaps governmental agencies can intervene to avoid that problem. 

More Views of the Subprime Mess

Steve Chapman of the Minneapolis Star-Tribune offers a different take on the subprime crisis in his column "The First Thing We Do, Let's Blame all the Lenders," which appears to oppose government intervention.  Some excerpts:

Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

* * *

If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records.

The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.

Nick Slade of the Caveat Emptor Blog responds here.

Meanwhile, Times columnist Joe Nocera has a piece on the FDIC's chair Sheila Bair, who conceived what became the Bush administration plan for dealing with the mortgage crisis.  Here are some excerpts on what led up to the crisis:

Particularly troubling to [Ms. Bair] was a series of popular adjustable-rate mortgages — loans with teaser interest rates of, say, 7 percent that would reset within a year or two at much higher interest rates. “That could often bring a payment shock of 30 to 40 percent,” she said.

The truth is, when these loans were made, nobody ever expected that they would be repaid. Instead, the widespread assumption was that they would be refinanced before the reset ever kicked in. “If you look at the 2003 originations,” she pointed out, “they were almost all refinanced instead of reset.” That was possible of course, because housing prices were still rising at a historic pace —and everyone believed they would keep going up forever.

But of course, the rise in housing prices was unsustainable, and by 2007, the housing bubble was over. Suddenly all those new homeowners with adjustable-rate subprime mortgages poised to reset in 2008 and 2009 were stuck.

The article also describes some of the other events leading up to the Bush plan and offers criticism of the plan.  It's worth reading.  Another Times columnist, Floyd Norris, compares the Fed's proposed rules to the movie "It's a Wonderful Life" here.

Then there's the litigation.  The Times reports here on the Illinois Attorney General's investigation of Countrywide and suit against mortgage broker One Source.  An excerpt:

The attorney general’s lawsuit contended that One Source put borrowers into loans with terms they did not understand, especially so-called pay option adjustable-rate mortgages. * * * These Countrywide was One Source’s main provider of pay option loans, documents in that case show.

* * *

Donald Wagner, a professor . . . at North Park University on Chicago’s North Side, is a One Source client who has talked to the attorney general about his troubles with a Countrywide pay option loan. In March 2005, he refinanced his fixed-rate mortgage to help pay for his daughter’s college education. He said the One Source broker did not tell him his low teaser rate — less than 2 percent — would jump after just one month.

“I kept asking them and checking on that,” Mr. Wagner said. “Then it jumped to more than 7 percent and now it’s up to 8 percent plus and it’s going to jump again. I am actually paying out over 60 percent of my monthly income, and it’s only so long that I can do that.”

* * *

One Source also used high-pressure tactics to rush borrowers through their loan closings, according to the suit. Most of the closings took less than 30 minutes, the attorney general said, with some only 10 to 15 minutes. One borrower was told that “it would take two days to explain everything,” and that the closing had to take place before that.

Some borrowers told Illinois investigators that they did not know One Source brokers had inflated their incomes to get them a larger mortgage. One consumer provided pay stubs and tax returns to One Source showing her income to be $2,200 a month, the suit said. Only later did she discover that One Source had listed her monthly income as $9,000.

Is this a case of dueling stories?  It seems more likely that different borrowers had different reasons for taking out their loans. 

What about mediation?  They're trying that in Iowa, as discussed here.

Oh, and want to find out the real cost of mortgages but don't trust (or can't decipher) the TILA and RESPA disclosures?  Try http://www.feedisclosure.com/, as discussed here.

And here is another story on the impact of the crisis and foreclosure on a family.

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. 

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. 

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).

Another Ohio Judge Halts Foreclosures

By Alan White

A state court judge in Cincinnati has dismissed a foreclosure action because the securitization trust filing the suit was not the holder of the mortgage at the time it sued the homeowner. The judge then took the unusual step of ordering the law firm filing the foreclosure to file proof of mortgage ownership before filing any new foreclosure actions for any clients. The mortgage at issue was a teaser rate ARM, and the couple involved say they had made a payment agreement with the servicer before the foreclosure was filed.

The Ohio Attorney General Marc Dann has already filed motions in several Ohio counties to stop foreclosures until their legal ownership is properly established.

In many cases, the securitization trust that owns the loan will be able to obtain the necessary mortgage assignment and a properly endorsed Note, but careful compliance with court rules will put off foreclosure for 30 to 60 days. In other cases, however, especially when the original lender has gone bankrupt or otherwise imploded, it may be difficult or impossible to get the necessary signatures, and the necessary documents, to complete a legal transfer of the mortgage that was not completed before the foreclosure. There is no reliable way to estimate the percentage of cases where ownership paperwork will be unavailable, but it will be significant. Hopefully, while the servicers search frantically for the missing paperwork, they can focus more time and attention on making reasonable modifications of loan principal and interest to allow homeowners to stay in their homes, and mitigate losses to investors. The significance of these cases may also go beyond the "real party in interest" issue, as state and federal court judges may decide to flex their muscles and become less and less inclined to rubber stamp the rising flood of foreclosure filings.

A note to law professors: the Cincinnati Enquirer story cites the study of mortgage servicer errors by Katie Porter, the same study that was also cited by one of the Ohio federal court judges. Good scholarship makes a difference.

Kurt Eggert on Abuses by Mortgage Servicers

Kurt Eggert's article "Limiting Abuse and Opportunism by Mortgage Servicers" in 15 Housing Policy Debate No. 3 (2007) can be found at http://ssrn.com/abstract=992095.  Here's the abstract:

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

The causes of such practices and the market forces that can rein them in are discussed. A case study of one mortgage servicer describes its unfair treatment of borrowers and the reforms imposed by federal regulators and other market participants. Both regulatory agencies and rating agencies appear to have increased their scrutiny of servicers' behavior, and states have passed new legislation to limit abuse. This article concludes with a discussion of proposals for further reform should these steps prove inadequate.