ABI Bankruptcy Blog Exchange » Items by Katie Porter

Items by Katie Porter

Modification Scams

Posted: November 12th, 2009, 4:28am PST by Katie Porter

While the loan origination fraud is largely shut down, the foreclosure crisis has spawned a whole new consumer fraud in the form of foreclosure rescue and loan modification scams. These companies offer to help consumers get a loan modification or to fend off a foreclosure in return for high, upfront fees. A great insider view of how these companies profit on the backs of desperate consumers is available in the receiver’s report in U.S. Foreclosure Relief, which was shut down in response to enforcement action by the Federal Trade Commission and the Missouri and California State Attorneys General. The receiver describes the business as a “high-pressure, cash-up-front telephone sales business targeting distressed homeowners” and gives details on just how these companies rake in incredible profits while stringing along homeowners. In the case of U.S. Foreclosure Relief, the company advertised a “90% success rate” when in fact only 11% of its clients got completed modifications (no details on whether the terms of such modifications offered any meaningful relief or not). Sales agents competed to win a Rolex watch, were told to “stop being so nice” and instead to hammer home to consumers how much worse their problems would get if they didn’t hire a modification consultant, and got paid a bonus if the consumer paid via direct deposit. How profitable was this model? Consumers paid $2950 for “assistance,” and U.S. Foreclosure had gross revenue of $5.9 million, with operating expenses of $1.7 million, producing $4.5 million in profit. Nice margin, huh?

Thinking of starting up such a business yourself but, of course, being honest and legitimate? Think again. The receiver concluded that if the business were run lawfully, profitability would be “severely challenged.” In fact, I recently asked a panel of experts on foreclosure rescue scams if they thought ANYONE, even one of them, could legitimately advertise that they provided loan modification assistance. Given the long odds in getting a loan modification, even with HAMP finally somewhat operational, perhaps the best one can offer is to take on the frustrating work of trying to get a modification. But without some chance of success, perhaps most modification assistance is a mirage.

Subprime, Exotic or "Crap?" Mortgage Industry Lingo

Posted: November 5th, 2009, 4:00am PST by Katie Porter

Former Credit Slips guestblogger Max Gardner is always trying to understand the real mechanics and economics of mortgage servicing. At one of his infamous bootcamps, he had an employee at a now-deceased mortgage servicer share an insider’s perspective on default mortgage servicing. The employee used some terms of art that are pretty revealing of the serious problems in the mortgage industry. For example, servicing technicians who have to load a new set of subprime or Alt-A loans into the system call those loans “Crap of the Crop,” because even on arrival at the servicer all or almost all of the loans already have major problems such as incomplete documentation, existing defaults, etc. Another popular term is “scratch-and-dent” loans. Quite a bit more colorful, then “subprime” isn’t it?

The explanation for why homeowners can’t get reliable answers on loan modifications is that the default servicing technicians are “cab drivers,” when successful HAMP and other loss mitigation programs would require “cup drivers” in NASCAR parlance. The servicing industry doesn’t care much for “CRAMP,” their term for Hope Now and HAMP, which the former employee described as a vehicle designed for an 8-lane Interstate running on a two-lane country road. And those qualified written requests that consumers can use to get information on their mortgage loans? Those QWRS are “Quite a lot of Written Regurgitated S**t” because most consumers won’t know what to do with the information that the system spits out in response to the request. Depressing that the best legal tool consumers have may be aptly described with such acronym. If there is a bright spot here, it’s that folks like Max who are holding the industry’s feet to the fire are making a difference. In fact, Max got his own term. A “BCA” is a boot camp attorney, whose request means a lot of work and trouble for the unlucky servicing tech who gets such correspondence.

Spookiest Bankruptcy Opinion of 2009

Posted: October 30th, 2009, 4:37am PDT by Katie Porter

It's Halloween, and time for nominations for the Spookiest Bankruptcy Opinion of the Year. Comments are open. Name the opinion that gives you goosebumps, and explain why others should be scared . . . very, very scared.

My own nomination is Sternberg v. Johnston, ___F. 3d. ___, 2009 WL 3381162 (9th Cir. Oct. 22, 2009). This gem not only creates a Circuit Split (always scary to invite the Supreme Court into bankruptcy jurisprudence), but will harm both creditors and debtors. Why? Because the opinion will deter debtors and their attorneys from pursuing creditors who commit willful violations of the automatic stay. This is frightening because the stay is so key to the collective nature of bankruptcy; the stay protects both debtors and creditors and ensures an orderly bankruptcy process. The words of the stay won't have much teeth if nobody sues for damages in willful violations. Sternberg will dramatically reduce the enforcement of the automatic stay because it holds that attorney fees for pursuing a damage award for a willful stay violation may not be recovered as "actual damages" under 362(k)(1). A law without enforcement . . . that's a ghost that won't scare anyone.

Means Test Changes Won't Mean Much

Posted: October 26th, 2009, 3:34am PDT by Katie Porter

Controversy abounds these days about whether government programs should adjust downward to reflect cost-of-living and income declines. I’d like to stir up a little controversy here at Credit Slips about Bob Lawless’ recent post that said the drop in median state income will "make it harder to file bankruptcy." First, I don’t quite follow the logic of the concern. Even if the income cut-off drops, "median" still means that half of all people are below the number. I would expect those considering bankruptcy to occupy the same places in the distribution of incomes in their state, regardless of median income fluctuations. So, it seems to me then that the fraction of potential bankruptcy debtors with above-median income would remain constant, even if the median income drops. The legal standard isn't changing, so I don't think it is fair to call the change in median income a "tightening" of the bankruptcy law. Second, even if bankruptcy filers don’t experience the general decline in income of the state’s entire population, the effect of a change in median income on bankruptcy eligibility is likely to be very, very small. Bob admits the change won't affect "a lot" of people but also says it won't be "a few." I think it really will be just a few. Why? Because the fraction of those made ineligible because of the means test is really tiny, and so even over an anticipated 1.5 million bankruptcy cases in 2009, we are looking at a minute change when we talk about adjusting the operation of the means test. In 2008, only 10% of chapter 7 debtors had above-median incomes. And nearly all of that 10% passed the means test once expenses are deducted. According to its report, the U.S. Trustee filed a motion to dismiss for abuse in 2,881 Chapter 7 cases--that works out to 4% of all above-median cases and .4% of all chapter 7 cases. Those numbers are hard to square with any fear that there will be any measurable change in the fraction of people made ineligible for chapter 7 this year. Importantly, these numbers don’t reflect how the very existence of a median income test may discourage people from filing a bankruptcy case or may push people directly to chapter 13 rather than risking an abuse determination. But again, that effect—whatever its magnitude—probably won’t change with median income fluctuation.

Lying Is Wrong

Posted: October 9th, 2009, 4:53am PDT by Katie Porter

You might think that we all caught the lesson that lying is wrong somewhere between Sunday School and warnings that Santa only brings presents to good boys and girls. But an Ohio federal court recently caught a debt buyer making a a load of lies--under oath, no less. The opinion in Midland Funding v. Brent shows the underbelly of debt collection and just how far such high-volume, routinized, computerized processes have strayed from the idealized litigation model of truth-telling.

The case began when a debt buyer purchased defaulted credit card debt and filed suit against a consumer. The debt buyer's law firm used the debt buyer's "You've Got Claims" system (really, that is its name) to request an affidavit from the debt buyer to file in support of the collection case. Where do such affidavits come from? According to later testimony of the debt buyer's employee who signs 200 to 400 affidavits per day, "they just come from the printer" (again, I'm not making this up.) The court couldn't square that answer with the first paragraph of the affidavit in which the employee attests that "I make the statements herein based upon my personal knowledge." The court goes on to describe the affiant's lack of knowledge of nearly all the facts in the affidavit, noting that the affiant did not retain the attorney, was not familiar with the account, did not know the last time a payment was made, did not know if the consumer was a minor or mentally incapacitated, and did not know the outstanding balance. As an additional disability, the affidavit wasn't actually signed in the presence of a notary, making it improperly sworn. The court ruled that the use of the false, deceptive and misleading affidavit in the debt collection suit was a violation of the Fair Debt Collection Practices Act.

The law in Midland is boring. It is wrong to lie to a court, and it is wrong to lie in a debt collection. The action here is that there actually was an action. Some consumer went to the effort to put a debt buyer's affidavit to the test, leading to the conclusion that the process for generating such affidavits was sorely lacking. How many debt buyers, or default mortgage servicers, also have employees who get their affidavits "from the printer?" Or who have "personal knowledge" of consumers they have never met and of accounts they have never reviewed? Or who send affidavits "off to be notarized?" If the processes used here are typical of the industry, there could be a lot of liars out of luck.

Risks of Reverse Mortgages

Posted: October 7th, 2009, 4:58am PDT by Katie Porter

In a world of news stories about crippled credit markets, at least one group of Americans still faces the problem of aggressive loan marketing. Senior citizens are on pace to set a new record in 2009 for reverse mortgages, complicated financial products that enables seniors to extract equity in their homes. A new report from the National Consumer Law Center makes parallels between today's reverse mortgage market and the subprime market of a few years ago (yes, the market that exploded the world economy). Tara Twomey, a repeat Credit Slips guestblogger describes in the report how incentives for broker compensation, a rapidly growing securitization market, and weak or non-existent regulation all expose seniors to risky transactions.

The key recommendation is the imposition of a suitability standard on lenders. That is, lenders and brokers would have to make a good faith determination of whether a loan was appropriate given a senior's situation. The NCLC made this same recommendation for subprime loans in 2006, and it was ignored. Given the relatively modest size of the market ($17 billion), the vulnerability of the senior population, including the fact that these are once-in-a-lifetime/no-learning-curve transactions, and the collossal fallout from identical conditions in the subprime market, the reverse mortgage market seems like an ideal chance to give the suitability standard a real-life test drive. If America had a Consumer Financial Protection Agency, it might take-up that opportunity. In the meantime,it's consumer regulation as usual, with some occasional words of warning from regulators with limited authority and pending Congressional legislation that takes aim at only the most egregious abuses.

Tenant Protections in Foreclosure

Posted: September 14th, 2009, 7:24am PDT by Katie Porter

A foreclosure has a ripple effect, as a number of commentators have observed. Foreclosed properties often sit vacant, leading to nuisance concerns, lower property values for neighboring houses, and higher crime rates. But some properties are not vacant on the day of foreclosure, and these occupied properties generate their own externalities.

After foreclosure, the new owner (usually the lender is the purchaser at the foreclosure sale) will typically send someone to see if the property is vacant. If not, the lender files an eviction or lawful detainer action. In many instances, especially in those formerly-booming real estate markets like Florida and Nevada, the occupants are tenants, not the homeowners. Depending on state law, renters often have no right to notice of the foreclosure and no right to remain in the property. The Chicago sheriff, Thomas Dart, stopped doing evictions after foreclosure last fall because of concerns about unjust harm to tenants.

Title VII of the Helping Families Save Their Homes Act provides uniform federal protection to tenants after foreclosure--at least until the law expires on Dec. 30, 2012 (apparently the date by which someone thought the foreclosure "crisis" will have abated). The law requires the new owner of a foreclosed property to allow tenants to stay in the foreclosed property for the remainder of the lease. If there is no lease, or if the lease is terminable at will under state law, tenants must be given at least 90 days' notice before they may be evicted. This is a floor that does not preempt more generous state law.
I'm interested in how financial institutions and tenants are going to deal with these requirements. Lenders have attorneys who routinely handle evictions after foreclosure. Being a landlord is a different task. Are tenants supposed to call the former owners' mortgage servicer when their pipes burst? If not, how is the tenant supposed to learn exactly who is the new owner of the property? Are note holders actively hiring property management companies to comply with this rule? Perhaps more interestingly, the bill doesn't seem to permit an eviction during the 90 days even if the tenants declare they aren't going to pay a dime of rent!
The Office of the Comptroller of the Currency has hardly offered answers to national banks. After waiting three months after the law's effective date, it put out a one-page release advising banks to "adopt policies and procedures to ensure compliance." Gee, that's helpful. I'm betting the readers of Credit Slips will have some more concrete thoughts about this.

Overspenders to face tax audits?

Posted: September 8th, 2009, 5:40am PDT by Katie Porter

A recent article in the Wall Street Journal reported on a new effort by the IRS to catch tax cheats. The IRS is going to compare data on mortgage-interest payments provided by financial institutions with homeowners' declarations of income on tax returns. The idea is that people must have more income than they reported to the IRS if they are able to make their mortgage payments, the bulk of which for homeowners with new loans from purchase or refinance, will be payments toward interest. Using data from 2005, the Treasury inspector general said that "tens of thousands of homeowners who paid more than $20,000 in mortgage interest" reported income that appeared "insufficient" to have covered their mortgage payments and basic living expenses. I don't doubt that fact, but I see an alternate hypothesis to explain the situation. These families are accurately reporting their income, but they are just spending more than they earn. They have houses they cannot afford, and they use Capital One to finance their basic living expenses so their income dollars can go to mortgage payments. Back in 2003-005 when these data were gathered, the credit market was loose and many families made up shortfalls in monthly living using credit cards, or in some instances, doing a cash-out refinance, and then living off the cash, expecting the housing market to sustain this strategy. Relying on debt to make ends meet has always carried risks, including bankruptcy risk. Should we add the risk of a tax audit to the reasons that families need to keep income and expenses in alignment?

The Benefits of Being Litigious

Posted: August 24th, 2009, 10:02am PDT by Katie Porter

Adam and I have recently discussed our take on whether and why the Fair Debt Collection Practices Act (FDCPA) should apply to mortgage servicers. The take-away was that the current interpretation of the FDCPA, based on its legislative history, is that it does not typically apply to mortgage servicers.

But perhaps debtors should be challenging that interpretation. Although the weight of case law suggests it would be a difficult litigation victory, it turns out that suing under the FDCPA, regardless of outcome, has a crucial side effect. Columbia Financial International sent me an email a few months ago advertising a brand new feature--the opportunity to scrub a collection database against its FDCPA litigant database. Columbia Financial advertises that this Litigant Alert service "empowers you to protect yourself from overly-litigious debtors" and "find out immediately if you are collecting against anybody with a history of suing collection agencies."

What is the implication of this advertising? It suggests to me that if a debt collector found a match, i.e., was collecting from someone who was an FDCPA plaintiff, the debt collector should what . . . . either stop collecting or start complying with the FDCPA? The industry is supposed to already be complying with the FDCPA; we've heard lots of stories about the burden that it puts on collectors--to log and record their calls, to add a debt collection notice to their correspondence, etc. If a collector is in full compliance, why care if someone has sued another debt collector who may not have obeyed the FDCPA. Perhaps the suggestion is that debtors bring malicious and ungrounded lawsuits, alleging FDCPA allegations when there are none? The "overly litigious" description of FDCPA litigants certainly suggests that debtors have engaged in wrongdoing by filing claims. But notice the perverse incentive created for consumers--the apparent benefit of filing an FDCPA lawsuit is a respite from dunning and collection efforts.

Complaining to HUD about Servicing: Thunder on Deaf Ears?

Posted: August 20th, 2009, 5:30am PDT by Katie Porter

In my own research, and frequently on Credit Slips, I've noted problems that homeowners face in dealing with their mortgage servicers. As a recent post from guest blogger Max Gardner explained, many of these problems are structural to the servicing industry. I think the people on the phone are good folks, trying to be helpful, but without the tools, training, and resources that they need to do so. One marker of the increasing pressure that servicers are under is the HUD complaint statistics. According to this Pro Public report, mortgage servicing issues were 31% of complaints to HUD in 2006. Just two years later in 2008, that fraction has jumped to 78%. No surprise here. More families are in default or foreclosure and that means more friction between homeowners and servicers. And as many of us have pointed out, consumers aren't the mortgage servicers' customers--the mortgage note holders are. So it makes sense that consumer satisfaction ("non-customer satisfaction", so to speak) is low in the industry.

The interesting part to me is that HUDs own complaint website doesn't even list mortgage servicing as an area of concern. Four out of five consumers who contact HUD are frustrated with their mortgage servicer, but HUD doesn't even acknowledge--at least in the obvious location--that it is in charge of complaints about mortgage servicing? I think this reflects a real problem in consumer protection regulation. Perhaps HUD sees mortgage servicing as just pretty far afield from its core concerns about housing discrimination and federal housing programs. HUD, more than any other agency anyway, has authority to implement the Real Estate Settlement Procedures Act (RESPA), which provides a process (a QWR) for consumers to motivate servicers to respond to problem. But historically, and still today, HUD's oversight of mortgage servicing could generously be characterized as "thin." Is mortgage servicing an example of the need for a Financial Product Safety Commission or will the mortgage market (when, and if, it revives itself) offer new and improved servicing models that reduce consumer frustration and improve transparency?

Thanks to Max

Posted: August 18th, 2009, 11:42am PDT by Katie Porter

As always, it was a delight to spend (virtual) time with Max Gardner. His posts reflect his extensive experience as a consumer bankruptcy attorney, and his dedication to using legal tools beyond bankruptcy--such as RESPA, the Truth in Lending Act, and the HAMP modification program--to help his clients save their homes. People tell me his Bankruptcy Bootcamps are worth every hour and cent they devote to attend, and we are grateful to him for sharing his insights with us on Credit Slips.

Greetings to Max Gardner

Posted: August 10th, 2009, 2:33am PDT by Katie Porter

Credit Slips welcomes O. Max Gardner III as a guest blogger. In my opinion, Max is as close to a celebrity as the consumer bankruptcy bar has today, gaining fame for his Bankruptcy Boot Camps. At those camps, and as a speaker around the country at continuing legal education programs, Max shares his approach to helping families save their homes in bankruptcy. He is a true expert on mortgage servicing and was featured on Nightline for his work. I often get the pleasure of presenting with Max at educational programs, and I can assure you that his humor always brings down the house. I learn something every time I talk to Max, and I am certain our Credit Slips audience will find his posts informative. Wtih mortgage servicing again back in the news, Max is certain to be attracting new attendees to his bootcamps and coming up with new litigation strategies to help struggling homeowners.

Fed Conference on Consumer Credit

Posted: July 30th, 2009, 9:37am PDT by Katie Porter

The Federal Reserve Bank of Philadelphia is hosting its biennial researh conference, Recent Developments in Consumer Credit and Payments. The seven selected papers represent hot topics in economic research on consumer credit. Two papers focus on mortgage issues, including a paper by Tomasz Piskorski on the effects of securitization on distressed loan renegotiation. This has been a hotly contested topic, both on Credit Slips and in policy circles. The New York Times had a front-page story today on the incentives of servicers to modify loans, touching upon studies that examine how and whether securitization may limit modifications. Other papers deal with payday borrowing, bankruptcy reform, and retail lending. The full agenda is here.

The conference will be held Sept. 24-25 in Philadelphia. Registration information is available from the first link above.

Mortgage Servicing Update

Posted: July 24th, 2009, 9:37am PDT by Katie Porter

Complaints about mortgage servicers are piling up almost as fast as foreclosures. Yesterday CNN reported that the GAO has concluded that the Obama Administration's HAMP and HARP programs to do loan modifications are off to a very, very slow start. The programs were announced in February, and to date we have 180,000 people in three-month trial modifications. That's a far cry from the 3-4 million people the Administration believed would be helped. Consumer advocates say that servicers remain unresponsive to requests for loan modifications, citing the same stories of incompetent or inadequate personnel, lack of follow-up, and refusal to modify unless a homeowner is in default.

At the same time, judicial criticism of mortgage servicing is picking up steam. A good example is Bankruptcy Judge Diane Weiss Sigmund's opinion, In re Taylor, released in April. The thoughtful opinion sheds light on the underbelly of mortgage servicing. She details the relationship between local and national counsel, Lender Processing Services (formerly d/b/a Fidelity National), and the mortgage servicer. Among other things, she finds that the attorney signing the proof of claim, a legal document filed with the court, reviewed a "sample" of 10% of the claims that his own signature was affixed to. In Taylor the proof of claim had the entirely wrong person's note attached to it (I wonder about a privacy violation here as bankruptcy documents are public), and an incorrect payment amount.

On a monthly basis, Tara Twomey and I post an updated version of our Mortgage Servicing Resources document to our Mortgage Study website, which also contains our papers on the subject. We are grateful to colleagues from around the country who forward us interesting cases that we collect in this document, but we wish studying mortgage servicing wasn't such a growth industry. We hope the Obama Administration can find a way to shape up mortgage servicers in time to help Americans keep their homes.

Welcome to Prof. Kevin Leicht

Posted: July 10th, 2009, 9:16pm PDT by Katie Porter

I'm delighted to welcome Professor Kevin Leicht to a guest-blog stint at Credit Slips. Kevin is a colleague of mine at the University of Iowa, where he is the Director of the Institute for Inequality Studies and the Director of the Social Science Research Center. He is a Professor of Sociology, whose research interests include the sociology of work and social stratification. Debb Thorne and I have enjoyed Kevin's recent book, Postindustrial Peasants: The Illusion of Middle-Class Prosperity, which discusses changes in household wealth and wages in the last several decades.

Kevin has a delightful sense of humor, which I got to enjoy during his participation in the recent week-long seminar that I organized at Iowa called Borrowing to the Brink: Consumer Debt in America. Kevin's project for the seminar questioned whether Americans' increased access to credit reflects economic growth or masks declining financial security for American families. It's an important question, and I look forward to Kevin's posts on this and related topics concerning the social effects of household financial well-being or distress.

Gamble Away the Risk

Posted: May 14th, 2009, 12:46pm PDT by Katie Porter

Bankruptcy is a back-stop for risk management errors. Last week I attended a conference sponsored by the Center for Health, Economic, and Family Security at Berkeley Law on the appropriate level of risk that government, private industry, and individuals should bear for a variety of risks--job loss, illness, changes in family needs, and others. Repeat CreditSlips guestblogger Christian Weller and Amy Helburn presented a paper on family debt and assets that highlighted the $15 trillion in lost household wealth in the 18th month period 6/07 to 12/08. The paper's key point is that our savings rate is too low. That is a pretty easy case to build, and as Weller and Helburn skillfully acknowledge, the trick is figuring how to stimulate savings. Anne Stuhldreher from the New America Foundation had lots of interesting ideas. The most fun one capitalized on the penchant for gambling. She reported that the average American spends $500 in scratch/instant lottery tickets per year. A pilot program in Michigan, Save to Win, gives consumers a chance at a $100,000 grand prize and monthly cash prizes. Each $25 deposit into the savings account is an entry to this lottery for savers. The highest take-up, as well as those depositing the highest percentage of their income, are residents of central Detroit. The program is proving particularly adept at motivating savings even among households with low-incomes or substantial risk of financial hardship. While only one lucky consumer will get rich with the grand prize, all these families reducing their risk of losing in the game of chance that is American household economic security by bolstering their savings.

AALS Debtor-Creditor Call for Papers

Posted: April 11th, 2009, 4:52pm PDT by Katie Porter

The Association of American Law Schools' Debtor-Creditor Section issued a call for papers on debtor-creditor scholarship, most broadly understood, for presentation at the AALS Annual Meeting in New Orleans in January 2010. Proposals are welcome from a wide array of perspectives and strong preference will be given to proposals from those who will not yet have been awarded tenure by January 2010 and to those whose work is not already well known within the section. Proposals may be in any stage of production, from early-stage idea to mid-stage working draft to polished paper, though work that will not be published by January 2010 will be strongly preferred. There is no publication commitment. Deadline for submission is Monday, August 31, 2009. Please email proposals to Jason Kilborn at jkilborn@jmls.edu.

Download AALS_section_Call_for_Papers_2009

Does President Obama need to nominate 339 (or so) bankruptcy judges?

Posted: April 5th, 2009, 8:11pm PDT by Katie Porter

Tuan Samahon's new article, Are Bankruptcy Judges Unconstitutional?, 60 Hastings L. Journal 233 (2008), offers a fresh twist on the constitutionality of the bankruptcy judiciary. He sidesteps the Northern Pipeline v. Marathon debate about whether bankruptcy judges can or should be shielded by Article III tenure. Instead, he maps out an Article II challenge to the current appointment process for bankruptcy judges. Today, candidates apply for vacant bankruptcy judges positions, are reviewed by a merit selection panel and then are chosen by the U.S. Courts of Appeals. Prof. Samahon argues that modern bankruptcy judgeships have qualities such as safeguards against removal, expansive jurisdiction, and hefty duties that are incompatible, or at least colorably incompatible, with inferior officer status. While the "Excepting Clause" of the Appointments Clause in Article II permits "inferior officers" to be appointed by the courts, if bankruptcy judges are in fact "principal officers" of the United States, the Constitution would require the President to nominate and the Senate to confirm bankruptcy judges.

Prof. Samahon analyzes the tension between Morrison v. Olson and Edmond v. United States, suggesting that an appointments clause challenge to bankruptcy courts could come out either way. If Morrison is overruled, then existing bankruptcy judgs should be safe. However, if Morrison is good law and an appointment challenge succeeds, we would have 339 new positions to fill. And the fix used post-Marathon, vesting appointment in circuits courts won't work, leaving the Senate and its staffers with a big task and lots of bankruptcy professionals with new opportunities.

The article has an interesting twist for judicial egos. Surely most judges would like to retain their positions and not have to endure a Presidential appointment and Senate confirmation process. Yet, it's an odd world where judges clamor to establish their "inferiority," especially after years of the bankruptcy judiciary working to establish its reputation as a highly-qualified and effective judiciary.

Laughing through the Pain

Posted: March 26th, 2009, 12:52am PDT by Katie Porter

This economic meltdown isn't fun for anyone, not even bankruptcy law professors. But Americans are creative, resilient folks and in the midst of hardship, some people are finding ways to cheer themselves with humor. Here are three recent examples to lighten your day:

A former student of mine wanted to teach his elementary school-age son about the financial system and give him a taste of entreprenuership. They created Bankster Buddies toilet paper, which is printed with the faces of government officials who had a role in the meltdown. The bipartisan paper bears a memorable slogan: They dump on us; we wipe with them!

Next up is the Disposable Bullshit Bag. The bag comes printed with directions and carries a handy warning: "Do not attempt to dispose of your BS through any government agency since they produce more bullshit than they can dispose of themselves." I've located a picture here but don't know where to purchase them. They are the perfect gift for that hard-to-shop for family member though.

Max Gardner of Shelby NC sent me a new twist on a classic song. Take a load off Fannie illustrates the current meltdown with visual images, including some great headlines from 2008 like "Bernake says housing crisis is contained."

I'm sure Credit Slips readers will have other examples. I think I've already pushed the outer limits of taste with my first two examples, so keep it in bounds, but feel free to share. We all need a laugh to lighten our load these days.

A Second Life for Old Cards

Posted: March 10th, 2009, 12:50pm PDT by Katie Porter

Credit Slips has an internal policy of not posting about anything other than debt or credit. No movie reviews, no divulging secret recipes, no waning on about a fabulous vacation to Nebraska. But I am nothing if not resourceful in circumventing policies, especially when they are enforced by Credit Slips blog master Bob Lawless.

Like virtually everything else, credit cards have a lifespan. Some die a natural death at expiration, replaced by the next generation of shiny replacements. Others terminate prematurely, either through suicide when their owners get fed up with their issuer's tricks or traps or through murder when the card issuer prematurely cancels the card. Both of these practices may be more frequent in the current down economy as NPR and creditcards.com have reported. What to do with all these old cards?

I turned my old card into a teething toy for my baby, Paul, as shown below. He seemed to really enjoy getting some hands-on experience with the plastic economy. (And I really wanted to show him off to the Credit Slips world (see Bob, it's credit-related!) Of course, depending on your proclivities, there are lots of other uses for old cards such as guitar picks or a tiled mosaic. I thought the best idea was to make the little things to keep the collars pointed on men's shirts (I'm certain one of you knows the correct name for these gizmos). Perhaps that's the secret to bankers' crisp fashions.

Anticipating Refund Anticipation Loans

Posted: March 7th, 2009, 9:27am PST by Katie Porter

I've clearly become predictable in my posts, as someone recently wrote to me wondering where is my annual tax-time rant against refund anticipation loans (RALs). In fact, I have written about them twice before on Credit Slips, here and here. But I think this annual lending "opportunity" deserves another round of criticism; this is a bad product that just won't seem to die. The number of RALs held fairly steady between 2006 and 2007, around 9 million loans.

RALS are 1 to 2 week loans administered by tax preparers and banks working together. The loans are secured by the taxpayer's expected refund. In their new report on RALS, the National Consumer Law Center and the Consumer Federation of America find that a typical RAL is about $3,000 and carries an APR of 77% to 140%. While the high APR for a RAL makes it similar to other short-term loans such as payday loans, there are some unique justifications for regulating or discouraging RALs that go beyond the high price paid by consumers.

First, about 2/3rds (63%) of RAL borrowers receive the Earned Income Tax Credit. Such taxpayers are only 17% of the entire population. The beneficial purpose of the Earned Income Tax Credit, which is funded by all of our tax dollars, is diluted when borrowers pay a chunk of their credit to banks and tax preparers for an RAL. Second, consumers taking out RALs appear to misunderstand their ability to access their tax refund quickly. A survey by the Treasury Inspector General for the IRS found that 85% of RAL taxpayers were willing to wait up to 9 days to receive their refund. Yet, if taxpayers e-file and use direct deposit, the average IRS processing time is 10 days. Third, RALs appear to increase tax noncompliance, probably because they incentivize preparers to inflate refunds. The IRS has determined that RAL users are 27-36% more likely to be noncompliant than non-RAL taxpayers.

States have tried to regulate RALs but faced preemption battles. In 2008, the Second Circuit invalidated a Connecticut statute that prohibited tax preparers from facilitating RALs with APRs that exceeded 60%. Federal legislation seems to be the only option for limiting RAL fees. If Senator's Durbins bill proposing a 36 percent cap on consumer lending becomes law, I may have to find a new way to mark the arrival of spring than a post on RALs!

Thanks for Kathleen Keest

Posted: February 16th, 2009, 8:44am PST by Katie Porter

Credit Slips thanks Kathleen Keest, Senior Policy Counsel with the Center for Responsible Lending, for her contributions as guest-blogger last week. Kathleen highlighted some historic trends in consumer credit and gave her insights on some very pressing current matters, including the underwriting of loan modifications and the securitization of auto loans. We hope to have her join us again and will keep an eye out for her continued advocacy efforts on behalf of American families.

Mortgage Database

Posted: February 14th, 2009, 8:23am PST by Katie Porter

The National Mortgage Data Repository is making its data available to a select group of applicants to conduct mortgage resarch. The Repository is a joint project of the National Consumer Law Center and the University of Connecticut School of Lawand includes data from 750 loans made in 10-15 states between 1994 and 2007. While the database isn't as comprehensive as HMDA or Loan Performance, it has a unique collection of data and the data are free. For each loan, the researchers have gathered the loan application, the truth in lending disclosure, the good faith estimate, the HUD-1 Settlement Statement, and the loan note. These are the core documents in a mortgage origination, making this a great dataset to study the costs of mortgage credit and underwriting decisions.

Research proposals of 2 single-spaced pages are due by March 31, 2009. Submissions are welcome not only from academics but also from advocates, attorneys, and other professionals interested in mortgage issues. (Having teamed up with guest blogger Tara Twomey for our Mortgage Studyof bankruptcy and homeownership, I encourage my scholarly colleagues to consider the many virtues of collaborating on research with attorney/practitioners). Authors whose projects are selected will present their work at a symposium in Spring 2010 at Valparaiso University School of Law. The full call for papers is here: Download Investigating Lender Practices in the Subprime Mortgage Market . Thanks to former guest blogger Pat McCoy for sharing this opportunity with Credit Slips.

Welcome to Kathleen Keest

Posted: February 8th, 2009, 7:00pm PST by Katie Porter

Credit Slips welcomes Kathleen Keest, an expert in consumer credit. Kathleen brings multiple perspectives to her opinions, having provided legal representation to low-income families as a legal aid attorney, exercised enforcement authority as an Assistant Attorney General in Iowa, and worked on policy issues for the National Consumer Law Center. Kathleen is currently Senior Policy Counsel at the Center for Responsible Lending, a Durham, North Carolina-based research group. The Center for Responsible Lending produces research and advocates for policy reform on nearly all the major consumer credit issues, including mortgage lending, payday lending, and credit cards. It is affiliated with the Center for Community Self-Help, a non-profit financial institution that has provided over $5 billion of financing to low-income households, small businesses, and non-profits.

Kathleen has received well-deserved recognition for her dedication to improving the consumer credit system. She has been honored with the NCLC's Vern Countryman Award, NACA's Advocate of the Year award, and ACCFSL's Senator William Proxmire Lifetime Achievement Award. My students know her from the 8th Circuit opinion, Besta v. Beneficial Loan Co., an important decision on unconscionability, in which the court relied on her expert testimony.

What's in a word (or 2?) Cramdown

Posted: February 2nd, 2009, 8:24am PST by Katie Porter

Last Sunday's New York Times Magazine's feature, On Language, discussed the etymology and signification of the word "cramdown." (Or is it "cram down?" That's a separate debate that professors have with law review editors every year).

William Safire observes that cramdown is coming into popular parlance as bankruptcy becomes an everday topic and the debate continues about the mortgage modification legislation. Credit Slips guestblogger, the Honorable Eugene Wedoff, found a use of the term in a 1948 law review article and a 1944 judicial opinion. The term has a general use as a verb to indicate forcing unwanted treatment on creditors. In today's bankruptcy context, the term refers to at least two specific types of such treatment: 1) reducing a creditor's secured claim to the value of the collateral and 2) confirming a chapter 11 plan over the objection of a class of dissenting creditors. Law students often become confused when their professors use the terms in these two different contexts. I try to use cramdown only to mean the chapter 11 voting override provision and instead speak of "lien stripping" to refer to the writedown of a secured claim under section 506 of the Bankruptcy Code. (Of course, lien stripping is a misnomer, since the the lien remains on the collateral and should not be confused with lien avoidance. What is being "stripped" in part is the value of the claim.)

Safire suggests that the ugly connotations of the word cramdown may be hindering legislative efforts to pass mortgage modification. Senator Durbin's spokesman said that the appropriate term to describe his proposed legislation is "judicial modification." While not as colorful as cramdown, it has the virtue of reminding people that a write down in principal is NOT the only feature, and may not even be the most beneficial or widely used feature, of the legislation. Depending on property values where you live, when you bought your house, the type of loan, and future interest rates, debtors may find reductions in interest rate or reamortizations of their loans to be more helpful in reducing their monthly payments and avoiding foreclosure. Using cramdown as shorthand to describe the bill gives short shrift to its potential benefits when all the term may invoke for many people is the specific ability to reduce a mortgage to the value of a house.

Should I file bankruptcy?

Posted: January 24th, 2009, 5:16am PST by Katie Porter

Several news stories have tackled this question about when a consumer should consider bankruptcy. In addition to the Newsweek piece that attracted lots of attention, today's New York Times Cost of Living column by M.P. Dunleavey is entitled "Bankruptcy as a Step to Solvency." The column tackles some of the concerns that people may weigh in deciding whether they need bankruptcy, and if so, whether now is the right time to file, including the effect of bankruptcy on credit, the ability to preserve assets, and other strategies such as dipping into retirement accounts to pay debts. Judge Bruce Markell recently came across a "rule of thumb" book that advised that people should consider bankruptcy if it would take more than five years to pay off your debts or you would have to use assets to do so. (Note: the Judge has no position/comment on the appropriateness/usefulness of such a rule). Many of our Credit Slips readers help clients answer this question about whether they need bankruptcy every day, and most of us have had to counsel friends or family about bankruptcy. What is your rule of thumb, if you have one? What is the "last straw" tactic that you think families should avoid and file bankruptcy instead?

Cramdown Controversy #2--Will I "Succeed?"

Posted: January 12th, 2009, 9:33am PST by Katie Porter

Our active readers at Credit Slips already started debating the second controversy about the pending cramdown legislation: is the failure rate of chapter 13 too high to make mortgage modification in bankruptcy a very useful tool? To briefly reprise that discussion and add my own gloss, there are longstanding lamentations that chapter 13 is a poor system because a minority of debtors completes the repayment plan and receives a discharge. The academic studies suggest the number is about 33%; I believe the National Association of Chapter Thirteen Trustees thinks it is about 40% (one wonders why the US Trustee Program doesn't carefully track this and publish it?)

So lots of chapter 13s fail. But what conclusion should we draw from that fact? This is a broad question and one that I'm exploring in a new empirical research project. I do not believe that chapter 13s "fail" just because they do not reach discharge. For now, let me narrow that concern to whether cramdown legislation is sound policy. A couple of observations:

The failure rate for chapter 13 may be, at least to some unknown degree, a result of housing affordability problems. Tara Twomey, John Eggum, and I have a forthcoming paper showing that over 70% of chapter 13 homeowners in our 2006 sample spent more than 1/3 of their incomes on mortgage payments, the HUD benchmark for unaffordable housing. If cramdown lets debtors reduce their mortgage payments, it may permit more debtors to confirm plans and give debtors needed flexibility in adjusting their budgets to the normal ups and downs of life. Put another way, the low chapter 13 completion rate may be an effect of the inability under current law to modify mortgages, which is all the more reason to permit such modification.
Lots of people are going to have upheavals in their lives just because that is life. As one of our Credit Slips commentators said: "Chapter 13 cases fail primarily because '_____ happens' in the 3-5 year term of the plan. Debtors live and die; they change jobs; they lose jobs; they move; they buy and sell homes; they get married; they get divorced; they have kids; they lose kids; they get sick; etc. -- all of which impact their financial circumstances." These circumstances would occur and be problematic regardless of how we structured the mortgage relief--that is, they would hamper non-bk court modifications too.
One benefit of modifying mortgages in bankruptcy is the potential to actually monitor what happens. IF the Administrative Office of the US Courts and the US Trustee Program release the needed data, scholars and advocates can track these cases. How many debtors are seeking modifications? What kinds of terms are courts granting? How are these debtors faring? Such data has been scarce of non-existent for the voluntary modification programs. What data do exist, such as those that Alan White examines, seem to me to indicate that a very high fraction of modifications are doomed to failure.

Cramdown Controversy #1--Who Do I Pay?

Posted: January 9th, 2009, 10:17am PST by Katie Porter

The pending legislation to permit courts to modify home mortgages is stirring up some controversies--even among its advocates. The key issues are operational and very important, I think, to the success of this legislation. Here's the first brewing controversy: How will consumers make the payments on these modified mortgages (directly to the mortgage servicers or through the chapter 13 trustee?)

The pending legislation contains language that would require the payments on mortgages modified in bankruptcy to be made "directly to the holder of the claim." In more than 2/3 of jurisdictions, chapter 13 trustees serve as conduits for at least many mortgage claims, meaning that the debtor pays the trustee the mortgage payment, along with their payment on their unsecured claims, and the trustee transmits the payment to the mortgage company. The legislation, apparently at the urging of some consumer advocates, would bar this practice. I think this is a bad approach for several reasons: Why change existing practices that are working well and add confusion? Some courts have local rules that require debtors to pay all claims through the trustee; the legislation would override such rules, which are growing in popularity becuase of problems with letting debtors make mortgage payments. Many debtors like the convenience of making only one payment--to the trustee--and letting the trustee disburse. It helps keep them on track financially and may improve completion of chapter 13 plans. Further, given the numerous and well-documented problems with mortgage servicers' ability to correctly apply payments in chapter 13 cases, why put the burden of sorting all those problems out on the debtor or debtor's counsel? If the trustee is the conduit for the payment, then the trustee can take steps to ensure the payments are applied properly and the debtor is being charged correctly. I suspect this stems from some concern that consumers shouldn't have to bear the added costs of paying a trustee. Many trustees, however, take only 5% commission instead of the usual 10% for the disbursement on mortgages, and if Congress is concerned about this, they could amend section 586 to provide for a lower trustee fee for mortgages. Also, consumers who pay the trustee are getting services; the trustee is the one who must wait on hold with the mortgage servicer, try to reconcile the accounting, deal with RESPA and escrow issues, etc. I think it is fair to pay trustees for that work. I think debtors should have the option of making payments on a modified mortgage either directly to the mortgage company or through the trustee, as is currently the practice.

Cramdown Commentary

Posted: January 9th, 2009, 6:37am PST by Katie Porter

Bob scooped me on an initial post about the deal between Citigroup and Senate Democrats on pending legislation to permit bankruptcy judges to modify mortgages in bankruptcy. But I have details. And commentary. And questions.

First, the letters from Citibank to the House and Senate outlining the changes that they request be made to the legislation are available in the middle of this WSJ article. They requested three changes to S.66 or H.R. 200 (both denominated the Helping Families Save Their Homes in Bankruptcy Act of 2009). First, that the legislation be limited to loans in existence when the legislation is enacted. This gives the bill a sunset, of sorts, but it could be a long one, given some people have 30 or 40 years left on their loans. Second, only when a violation would give rise to a right of recission under the Truth in Lending Act can the claim be disallowed. Given the relative difficulty and cost of litigating such claims, this is not, in my opinion, a large concession. Consumers retain their rights under the Truth in Lending Act to bring a claim under its provisions and recovery (puny) statutory damages. Third, a reduction in a loan's principal balance is only available if the homeowner certifies they contacted the lender to modify the loan before bankruptcy. Note that the "reduction in principal" is only ONE of the options available to bankruptcy courts. Apparently, the court could freeze or adjust interest rates or extend the term of a loan even if a borrower had not contacted the lender. The only problem I see here is if lenders begin litigating whether the borrower has indeed contacted the lender. Borrowers who did so by phone won't have great records of having done so. I would advise borrowers who call to also send a written letter and keep a copy asking for a modification.

Apparently, the news of the Citi's support for the legislation traveled fast and yesterday at chapter 13 confirmation hearings around the country, debtors asked to have their hearings continued to see if the legislation passed. I also wonder what are the options for homeowners who filed chapter 13 a few years or months ago and were not able to modify their home mortgages. Can they ask the court to modify their plan if the legislation passes?

Student Writing Competition on Bankruptcy

Posted: January 5th, 2009, 1:37pm PST by Katie Porter

Aspiring bankruptcy geeks (I surely mean experts) and their law professors take note: the National Association of Chapter Thirteen Trustees is sponsoring a law student writing competition. The paper can be on any issue that concerns chapter 13. The winner will receive a prize and the winning paper will be published in the NACTT Quarterly. The deadline is April 30th. The complete announcement is available on the NACTT website.

Fellowships for Consumer Debt Book

Posted: October 31st, 2008, 9:56am PDT by Katie Porter

Just a brief announcement for our academic audience (law or non-law) that I am directing the University of Iowa's Obermann Summer Seminar in 2009. Up to 6 fellowships of $2250 (plus an award of $1250 to cover travel, housing, per diem) are available for participating scholars to participate in the seminar, which will be held June 7-14 in Iowa City, Iowa. Selected scholars will have access to the 2007 Consumer Bankruptcy Project data in advance of the seminar to prepare an empirical paper on consumer debt or bankruptcy. These papers will be collected into a volume for publication with an academic press. Interdisciplinary applications are particularly encouraged but law professors are obviously welcome. The full call for proposals and application guideines are available here. The deadline for application is Tuesday December 9, 2008.

Creditors: Fear Not?

Posted: October 20th, 2008, 10:24pm PDT by Katie Porter

Just as public ire at the mortgage industry reaches a pinnacle, courts have offered the mortgage companies refuge from their mistreatment of consumers in some recent rulings. While these decisions may be aberrations, they have powerful lessons for consumer debtors and their attorneys that bear some discussion.

A bankruptcy court ruled last week that the United States Trustee (UST) lacked the authority to bring a complaint against Countrywide for abusive mortgage servicing practices. (Hat tip to Amir Efrati at the Wall Street Journal for bringing the ruling to my attention.)The In re Sanchez court concludes that the UST failed to state a claim for sanctions because the UST is not authorized to pursue sanctions. I disagree.

I think 11 USC 307, which says the UST may "raise . . . and be heard on any issue in case or proceeding" under the Bankruptcy Code, is intentionally broad and permits the UST to file a lawsuit against alleged wrongdoers, including one asking the court to use its section 105 equitable powers to sanction. While the court suggests that instead the United States Attorney is the appropriate party to punish violations of the bankruptcy laws (yes, for bankruptcy crimes but I'm not sure about civil redress?), the real lesson of the case is that debtors' attorneys need to bring complaints against the mortgage companies. Waiting for the court to identify problems sua sponte as in In re Parsley or hoping the US Trustee (or even less plausibly the US Attorney) will bring actions is risky at best and negligent at worst. Homeowners in bankruptcy need to know they aren't overpaying their mortgage company, and their attorneys need to shoulder this burden--at least until Congress or the rules committee or voluntary compliance does something to systemically improve the practices of servicers in bankruptcy cases.

The other victory of note for mortgage servicers was the ~~Third Circuit~~ First Circuit decision in In re Nosek. The court vacated the judgment against Ameriquest awarding the consumer $250,000 in emotional distress damages and $500,000 in punitive damages because it determined that there was no violation of either the Bankruptcy Code or the debtor's chapter 13 plan. The court said that 1322(b), which permits a debtor to cure a default over the course of a plan (such as by paying the mortgage arrears), did not impose any specific duties on a lender. Thus, although Ameriquest did not distinguish between the ongoing current mortgage obligations and the payments on the pre-petition debt in applying the debtor's payments, the court said that the failure of the debtor's plan to specifically obligate the creditor to apply the payments in accordance with 1322(b) to cure the arrears eliminated the debtor's ability to invoke section 105's enforcement authority. The lesson for debtor's attorneys here is that the chapter 13 plan itself apparently needs to specify how the mortgage company should apply the pre- and post-petition payments. While section 524(i), added as part of BAPCPA and not at issue in this case, may have given a different result, I think the Nosek decision strongly suggests that bankruptcy courts should permit debtors to include 524(i) language in their plans and debtors' attorneys who fail to do so--or at least fail to argue to a court that they can do so--are putting the rights of their clients at risk.

Consumer bankruptcy attorneys have a heavy burden to shoulder after BAPCPA, which imposed additional advertising restrictions, paperwork requirements, and potential liability on them. I think these two decisions add to the duties of debtor's attorneys, exacerbating concerns about the need for and the reality of increasing attorneys' fees for bankruptcy relief.

What Happens to Homeowners in Bankruptcy?

Posted: October 1st, 2008, 12:11pm PDT by Katie Porter

Amending bankruptcy law to permit judges to modify home loans for chapter 13 debtors does not seem to be gaining traction in Congress, despite the fiasco with the bailout vote and pressure to incorporate more "Main Street" provisions. For many reasons, I remain convinced that any bailout should attempt to limit losses at the family-level, rather than addressing only the end consequences for major financial institutions. That said, does filing bankruptcy improve a family's chances of saving its home?

A new paper, The Homeownership Experience of Households in Bankruptcy, by economists Sarah Carroll and Wenli Li provides a tenative answer to this question. Before summarizing the findings, let me emphasize a few key points. The paper's sample comes from Delaware. Yup, that's it. That limits my confidence, and to their credit, the authors' confidence, about extrapolating these findings to the whole nation. Another difficulty is that the housing market has changed so rapidly that despite the authors' quick production of this study, the mortgages of today's families may look very different from those of families that filed bankruptcy in 2002. Keeping those qualifications in mind, what do Carroll & Li report on how many homeowners that file bankruptcy avoid foreclosure.

In short, five to six years after their bankruptcy filing, 72.1% of families still owned their homes. The remaining 27.9% lost their houses. I read this as cause for optimism about bankruptcy's potential as a home-saving device, although Carroll & Li find that among homeowners who entered the foreclosure process and did not file bankruptcy, even 57% of this group owned their homes and avoided foreclosure.

Carroll & Li conclude that "bankruptcy does not help homeowners", but I think their data show the opposite effect. Bankruptcy does help, but perhaps more modestly than some would have anticipated. Also ultimately retaining the home may not be the only positive outcome of bankruptcy for a homeowner. Carroll & Li find that for those bankruptcies ending in a foreclosure sale, the bankruptcy adds about ten months to the process. This delay may be desirable if it mitigates some of the related costs of foreclosure by permitting families to locate alternate housing, even though it could reduce lenders' recoveries.

I disagree with Carroll & Li's effort to use their paper as evidence that modifying mortgages in bankruptcy would not be a substantial help for families. To me, the paper suggests the opposite, which is that bankruptcy's efficacy as a home-saving device could be improved if bankruptcy judges could, in appropriate situations, give families additional relief from their mortgage debt, such as by freezing an interest rate. Regardless of the interpretation, I think the authors would echo my hope that their paper stimulates more research on bankruptcy outcomes for homeowners.

It's Easier to Shoot Roadkill than Big Game

Posted: September 16th, 2008, 9:02pm PDT by Katie Porter

I'm a little miffed about the recent FTC settlement with Bear Stearns and its subsidiary, EMC Mortgage Corporation. The complaint alleged that EMC engaged in unlawful practices in servicing consumers' home mortgage loans, including violating the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, and the Truth in Lending Act. The FTC brought the complaint pursuant to its enforcement authority to regulate unfair and deceptive practices. A recently announced settlement requires Bear and EMC to pay $28 million to the FTC and enjoins the company from engaging in the alleged illegal practices. Given my concern about poor mortgage servicing, you might expect me to have nothing but praise for the FTC.

But my first reaction to the settlement was that the FTC is shooting roadkill. What do I mean? As Elizabeth Warren wrote back in May, "The Bear is Dead." It's easy to shoot a still target. Notably, the settlement order does not apply to JP Morgan, which purchased Bear Stearns. While EMC continues to function (even touting its "customer service" to borrowers on its webpage), the mortgage industry is reeling and I'm guessing the FTC won't be the only party standing in line with a judgment to collect. The FTC may have the same concerns; the settlement obligates Bear/EMC to wire transfer the $28 million in cash to the FTC within a few days.

Even assuming that EMC or Bear pays the $28 million, why didn't the FTC take action sooner? Regulators have had deaf ears for years with regard to consumer complaints and allegations of mortgage servicing abuse. While the FTC may have been negotiating with EMC for some time before it filed the complaint and reached settlement, during that period EMC presumably continued its practices, allegedly lying to consumers, some of whom may have lost their homes as a result of EMC's poor recordkeeping. Since EMC services about half a million loans, the injunctive relief prohibiting EMC from initiating any foreclosure action or assessing any fee without making sure its records are accurate, correcting any prohibited practices, and investigating any consumer complaints could protect consumers from wrongful foreclosure or being overcharged.

But the bigger question is what influence, if any, will the settlement have on other servicers? Will the remaining live targets of investment banks (a number that dwindles each day, it seems) fear that the FTC will reload its rifle and reform their servicing practices accordingly?

Be Careful What You Wish For

Posted: August 11th, 2008, 4:40pm PDT by Katie Porter

At legislative hearings on credit card legislation, bank industry representatives have emphasized that they are voluntarily improving practices (but see here for whether to take those promises seriously) and have argued that Congress should avoid legislating credit cards because federal regulators are better suited to the task. They proffer all the standard arguments about the relative benefits of regulation (agency expertise, flexibility, cooperative solutions, etc), and largely these arguments have worked. Despite hearings every year when members of Congress tell their own, their families' or their constituents' credit card horror stories, the legislation dies. The outcome has been that regulators continue as the primary actors in control of credit cards. In the last two decades, this has translated to little, if any, regulation of credit cards.

Increasingly, there are signs that the regulatory winds are changing (even as the administration and its regulators stay the same). Credit card companies might soon regret their pleas to "let the regulators do their jobs" if the regulators actually start using their authority in ways that equal or go beyond the relatively tame proposed legislation. A case in point is the recent FDIC and FTC action against subprime card issuers that seeks over $200 million in restitution for consumers.

The actions allege that CompuCredit and the issuing banks themselves (First Bank of Delaware and First Bank & Trust) engaged in unfair and deceptive practices in marketing three subprime cards. The products were so-called "fee-harvester" cards, in which half or more of the initial offer of "credit" is subsumed by required fees. The consumer is left with nominal credit, essentially having paid to be able to say they have a card even though there is little remaining credit line to draw on with purchases. The action alleges various other wrongs, including the marketing of a debt transfer card that would purportedly help consumers' credit scores but that actually enrolled them in a debt repayment program (and the consumers allegedly didn't even get the card unless they paid off 25-50% of their charged off debt within 12 months!).

Complaints about the fees and marketing of subprime cards are nothing new. Congresswoman Maloney's CreditCard Holders Bill of Rights, and other pending credit card legislation, would regulate the marketing and terms of these products. But while those bills languish in Congress, the "friendly" regulators may be on the faster track to protecting consumers. While this is only one enforcement action, the FDIC has expalined that the action should be a reminder that FDIC-supervised banks "must be highly vigilant about their third-party arrangements." In other words, the FDIC isn't going to let its institutions hide behind the misconduct of non-regulated subprime lenders while reaping profits. While $200 million is surely a pittance in the grand scheme of credit card profits, the action could encourage banks to reform their subprime card practices even as legislation to force them to do so stalls. When combined with the Federal Reserve's proposed rules to ban certain billing practices, credit card companies may find themselves forced by regulators to make the very changes that they were convinced they could avoid by defeating legislation.

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