Consumer Law & Policy Blog

Washington Post Articles on Proposed Legislation to Curb Credit Card Fees and a Possible Deal to Address Subprime Lending Mess

Today's Washington Post has two articles that are worth a look.

Here's one on planned legislative and regulatory efforts regarding credit card fees.  The first couple sentences of the article provides a flavor: "Senior Democrats on Capitol Hill want to ban excessive credit card fees. Bank regulators are on the verge of forcing companies to give more notice before raising interest rates. And New York's attorney general, whose investigations transformed the student loan industry, now has his eye on conflicts of interest in the credit card sector."  On the latter, the NY AG is looking into "arrangements in which companies that supply electronic cards used to pay for purchases at bookstores and cafeterias are granted exclusive access to market their card products to students."

And here's an article describing an almost-consummated agreement "between top Bush administration officials and a broad alliance of Wall Street's biggest banks, mortgage investors, nonprofits and consumer groups," under which "mortgage rates for homeowners with spotty credit histories would be temporarily frozen . . .."

Mortgage Modifications not Happening

By Alan White

Consumer advocates, state and federal regulators and politicians are calling on subprime mortgage servicers to modify loan terms to stem the rising tide of home foreclosures. Lenders are promising hotlines but what happens when homeowners call servicers? Are the servicers modifying loan terms? Unfortunately servicers are not making this information public, at least in an accessible way. Monthly reports to investors, however, do include some data on loan modifications. I decided to try tabulating numbers from some of the November monthly remittance reports to see what the servicers are doing. These reports cover only the loans in a particular pool, usually two to ten thousand mortgages from a single month or quarter. It seemed logical to start with groups of mortgages originated in the last two years, since most subprime mortgages (60% to 80%) are 2/28 ARM’s, with big payment increases after two years. I gathered the November remittance reports for five leading servicers to see what they were doing. The results are discouraging.

Listen to Panel on the Home Foreclosure Crisis

by Jeff Sovern

For those who can't keep up with all the readings to which this blog links, but who want to learn more about the home foreclosure crisis, you can click on this link to the predatory lending page maintained by the National State Attorneys General Program at Columbia Law School and scroll down to find an excellent panel discussion that you can download to your computer and MP3 player.  I've been listening to it while driving.  The speakers include Jane Azia, Director of Consumer Protection, New York State Banking Department, Margaret Becker of the Predatory Lending and Foreclosure Prevention Project, Staten Island, New York Legal Services, Professor Ronald Mann of Columbia, and Tam Ormiston, Chief Deputy Attorney General of Iowa.  The moderator is James Tierney, Director of the State Attorney General Program & former Attorney General of Maine. 

But if you do want more reading about the crisis, click here for Times columnist Bob Herbert's moving column in today's paper about one family's loan tragedy.  An excerpt:

One aspect of the so-called mortgage crisis that hasn’t been adequately explored is the extent to which predatory lenders have committed fraud against vulnerable homeowners. They have pushed overpriced loans and outlandish fees on hapless victims who didn’t understand — and could not possibly have met — the terms of the contracts they signed.

In some cases, corporate con artists have deliberately targeted and seized the equity of financially strapped and unsophisticated owners. In some cases, homes have been stolen outright.

This is an issue crying out for a thorough federal investigation.

A Comment on Investor Liability and H.R. 3915

by Jeff Sovern

I have not yet had time to study the new predatory lending bill passed by the House, H.R. 3915, which others have blogged about here and here, among other places, and so I am still forming my views on it.  Still, one thing that strikes me about the rationale for the bill is the stated need to limit the remedies  against holders of the troublesome loans.  The fear is that investors would no longer purchase loans if by doing so they were exposed to liability and so imposing liability would destroy, or at least damage, the secondary market in such loans. 

It may be that that fear is entirely justified for reasons of which I am unaware.  But it is interesting that similar arguments were made back when state legislatures, courts, and the FTC abrogated the holder in due course defense in certain consumer loans back in the sixties and seventies. See, e.g., Banta, Negotiability in Consumer Sales: The Need for Further Study, 53 Neb. L. Rev. 195, 196-97 (1974) ("many banking and financial institutions argue that if they were subject to consumer defenses, consumer credit might vanish or become so expensive as to be prohibitive."); Jordan & Warren, The Uniform Consumer Credit Code, 68 Colum. L. Rev. 387, 436 (1968) ("The reason for preferring the [lender] over the [buyer] is not that he is in any better moral position but because a holding in his favor should further the flow of commercial paper and stimulate investment."); Comment, Implied Consumer Remedy Under FTC Trade Regulation Rule--Coup de Grace Dealt Holder in Due Course?, 125 U. Pa. L. Rev. 125 U.Pa. L. Rev. 876, 880 (1977) ("The policy justification for this allocation of risk is that it promotes the availability of credit essential to healthy commerce."); see generally Jeff Sovern, Paradigm and Paradox in New York Consumer Credit Law: After Holder in Due Course, 6 Annual Rev. Banking L. 119 (1987).  Of course abolition of the HDC doctrine did not end consumer credit, and while it is impossible to know whether consumer credit would have been cheaper if the HDC doctrine had persisted in such consumer transactions, it seems clear that whatever increase abrogation of the doctrine produced has not been crippling to consumer loans.  In addition, imposition of liability on lenders also serves an important policing function--something lenders are better equipped to carry out than consumers--by giving lenders an incentive to remove dishonest operators from the market by refusing to purchase obligations from them.  Perhaps the situation today is different from the situation back then, but it seems to me that once such claims have proven false in the past, the burden of proof is on those who make the claims again to explain why we should take them seriously.

Some Particularly Good Journalism on the Subprime Mortgage Crisis

by Deepak Gupta

BBC News has been running a compelling series of articles on the subprime mortgage foreclosure crisis, including a particularly interesting article focusing on how the crisis is playing out in Cleveland, Ohio, which the BBC calls "the sub-prime capital of the United States."  The article collects some very alarming statistics and charts and includes an interactive map of Cleveland that lets you see the correspondence between subprime lending, foreclosures, and race.

Relatedly, an article by John Leland in yesterday's New York Times took a look at how the foreclosure crisis is affecting tenants.  "In the foreclosure crisis of 2007," the article begins, "thousands of American families are losing their homes without ever missing a payment. They are renters in houses whose owners default on their mortgages — a large but little noticed class of casualties."

Mortgage Bill Passes House

The House of Representatives has passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, by a vote of 291-127.  Not a single House Democrat opposed it.  CNN is reporting that the bill faces an "uncertain future" as it heads to the Senate--not because of opposition by consumer groups, mind you, but because industry lobbyists, the White House, and many Republicans don't want to see any regulation in this area at all.  (In recent days, we've blogged about the bill here, here, here, and here.)

Consumer Groups Oppose Predatory Lending Legislation

by Deepak Gupta

  A coalition of twenty national and local consumer and anti-poverty groups -- including Consumer Action, National Association for Consumer Advocates, National Consumer Law Center, Public Citizen, and U.S. PIRG -- came out in strong opposition to  H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, scheduled for a vote today in the U.S. House of Representatives.   We've previously blogged about this legislation here and here.

In a letter sent to Congress, the groups said that the bill, designed to address abuses in the lending market, would leave consumers worse off than if Congress did nothing at all.  The organizations decry the bill’s insulation of Wall Street and the removal of key state protections that borrowers use to protect their homes. 

“At a moment when the economy is being rocked by the subprime mortgage crisis and when predatory loans are sending millions of Americans into foreclosure, it is shocking that the House of Representatives is protecting Wall Street, instead of the consumers who are at risk of losing their homes,” said Joan Claybrook, president of Public Citizen.

Foreclosures Hit a Snag for Lenders

by Michael Quirk

  In today's New York Times, Gretchen Morgenson has an interesting article about an even more interesting federal district court opinion dismissing 14 home foreclosure actions based on lack of standing by the foreclosing bank trust.  The federal court's dismissal of these foreclosure cases is significant because the court found that the trust lacked standing to pursue the foreclosures because it could not demonstrate its ownership of the mortgages at issue, a problem that experts interviewed in the Times article say is exceedingly common in foreclosure cases throughout the country.

The federal court in In re Foreclosure Cases, No. 1:07CV2282, et al. (N.D. Ohio 10/31/07), Judge Christopher A. Boyko had demanded that foreclosing plaintiff Deutsche Bank National Trust Company produce copies of the Assignment of the Note and Mortgage in each of the 14 cases Deutsche filed showing that it was the owner of the mortgage loans at the time the cases were filed.  Instead, Deutsche produced Assignments stating a present intent to convey all rights.  The court found that this belied Deutsche's assertion that it owned these mortgages, and concluded that Deutsche therefore lacked standing to foreclose.  In addressing and rejecting Deutsche's arguments for recognizing its standing despite this lack of proof, Judge Boyko used a particularly colorful and effective analogy:

The Court will illustrate in simple terms its decision:  'Fluidity of the market' - 'X' dollars, 'contractual arrangements between institutions and counsel' -'X' dollars, 'purchasing mortgages in bulk and securitizing' - 'X' dollars, 'rush to file, slow to record after judgment' - 'X' dollars, 'the jurisdictional integrity of United States District Court' - 'Priceless.'

The Times article conveys the potentially enormous significance of this decision by interviewing market analysts and consumer advocates specializing in foreclosure prevention, all of whom say that this type of scenario where the foreclosing party cannot document ownership of the securitized mortgage is extremely common in foreclosure cases across the country.  This article is accessible here.

Another Times Editorial on the Mortgage Meltdown Legislation

by Jeff Sovern

Today's Times has an editorial on the mortgage legislation that is scheduled for a vote today on the House floor. The editorial observes that "Industry has already scored some regrettable victories. It persuaded the bill’s backers to include a provision that would prevent borrowers from suing Wall Street firms in state court — where consumer protections are often stronger — for common abusive loan practices."  The Times supports Barney Frank's amendment to "ensure that states are allowed to pursue cases against fraud, misrepresentation, deception, false advertising and civil rights violations."  It also describes as a "must-pass amendment" the proposal "that lenders must verify a borrower’s ability to repay."  Finally, the piece calls for giving "borrowers the right to modify an illegal loan, before they’re forced into foreclosure."

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: