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Financial institutions thought the Attorneys’ General agreement resolving the “robo-signing” mess would corral the potential liability they faced for flawed foreclosure practices.  But a pending court decision threatens to open the foreclosure liability box anew.

The Florida Supreme Court will decide whether a lender charged with fraud for submitting flawed foreclosure documents can eliminate the fraud charge by dismissing the case, correcting the documents and re-filing them in a new foreclosure action.

The decision will directly affect thousands, and potentially hundreds of thousands of homeowners in Florida, which has been the epicenter of the nation’s foreclosure crisis.  But it could influence the decisions in many other jurisdictions where courts are considering similar issues.  

The issues in this case (Roman Pino v. Bank of New York Mellon) echo those in a Massachusetts Supreme Judicial Court decision last year invalidating a foreclosure because the lender could not prove that it had received a valid assignment of the mortgage, absent which, the court ruled, the lender lacked standing to foreclose.

In this case, although the bank has negotiated a settlement with the plaintiff, Pino, under terms indicating that the terms of his mortgage have been “satisfied,” the Florida court has decided to issue a ruling anyway.  The decision is expected before the end of this year. 

Financial industry executives say a decision against the bank – in effect, barring voluntary dismissal as a means of correcting flawed documents – would be draconian and threaten the fragile housing recovery in Florida and anywhere else the theory is applied.

"An affirmative answer to the certified question would impact general credit and lending practices, just as the fragile real estate finance industry begins to rebound from a severe economic downturn." The Mortgage Bankers Association wrote in an amicus brief supporting the bank. 

Consumer advocates say as long as lenders know they can avoid liability for abusive foreclosures by re-doing them when challenged, they will have no incentive to change their procedures.  

CHANGES COMING

It seems that Federal Housing Administration (FHA) officials may have been listening after all to the complaints – angry, widespread and ongoing – about the agency’s stricter underwriting guidelines for condominium loans.  The Community Associations Institute (CAI) has spearheaded efforts to persuade the agency to rethink, revise and in some cases withdraw requirements that, industry executives say, are making it more difficult for prospective buyers to purchase condominiums and for existing owners to sell or refinance the units they own. 

Agency officials acknowledged recently that they are “evaluating potential changes,” but declined to specify what they might be.  Syndicated columnist Kenneth Harney first reported that the FHA was going to ease some of the restrictions, in a column noting the problems the rules have created for individual buyers and sellers, for condominium communities and for the housing market as a whole.

“According to condominium experts, realty agents, lenders and builders, FHA’s rules have become overly strict and have cut off unit buyers from their best source of low-cost mortgage money, thereby frustrating the real estate recovery that the Obama administration says it advocates,” Harney reported.

CAI officials are predicting that the delinquency limits and certification requirements community associations must meet to make units eligible for FHA financing may be among the areas FHA will revise.  The delinquency restrictions, barring FHA loans in any community in which more than 15 percent of the owners are more than 30 days delinquent on common area charges, disqualify many communities in areas hard-hit by foreclosures, industry executives say, while the certification requirements – and concerns about the potential liability they create for board members – have prevented many more communities from even seeking FHA approval.

The trade group is expecting only “modest” revisions in the certification requirements, however.  A recent analysis for members notes:  “CAI does not anticipate FHA will modify the certification to protect signors from making legal determinations or attestations that the condominium is in compliance with all applicable local, state, and federal laws and regulations.” 

NOT (VERY) INTERESTED

The Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) have taken to the airwaves and other marketing venues in an effort to persuade homeowners who lost their homes to foreclosure to have those actions reviewed.  Fewer than 4 percent of the 4.1 million people who have received notice of the review option – about 165,000 owners – have responded to the invitation thus far, according to a recent OCC report.  The deadline for responding is July 31.

The foreclosure review is one of the requirements lenders had to accept as part of an agreement with federal bank regulators resolving complaints about widespread foreclosure abuses.  Fourteen major mortgage servicers signed the agreement, which requires them to review foreclosures for borrowers eligible for the reviews, and possibly offer restitution when errors or improprieties are found. 

The Fed has produced a video explaining the review opportunity and emphasizing that it is available free of charge for eligible borrowers –  defined as homeowners whose mortgages were in the foreclosure process in 2009 and 2010 and were serviced by one of the 14 companies covered by the agreement. 

The OCC has produced a round of media advertising in separate outreach efforts aimed at increasing the response rate.  The marketing materials explain how borrowers can apply for the reviews and note that they may be eligible for compensation from a $1.5 billion restitution fund financed by the lenders. 

Consumer advocates have criticized regulators for not doing enough to publicize the program.  Some speculate that consumers, wary of foreclosure assistance scams, may have tossed prior notices without reading them. Industry executives say they are puzzled by the anemic response.

"The effort is being made," Paul Leonard, the mortgage servicers' representative to the Financial Services Roundtable, told USA Today.  . "It's hard to say why people aren't responding."  

KNOWING THE SCORE

Consumers have become much savvier about credit scores, but they don’t know as much as they should, and those knowledge gaps could affect the cost and availability of credit for many borrowers.

An annual survey designed to test consumer knowledge of credit scores found encouraging improvement in the general understanding of how the scores are used and the key factors affecting them."

In the numerous consumer knowledge surveys we have undertaken over the past several decades, I have never seen such improvement from one year to the next," said Stephen Brobeck, executive director of the Consumer Federation of America, which conducted the survey jointly with VantageScore Solutions. But there is still considerable room, and need, for improvement, according to Brobeck, who cited several areas in which lack of information and misconceptions remain problematic.

On the positive side, more consumers knew:

  • Who collects the information on which credit scores are base;
  • What constitutes a “good” score;
  • How to increase a low score; and
  • That it is important to check the accuracy of credit reports periodically.

More than two-fifths of the respondents had obtained or received their credit scores in the past year, and the survey found that members of that group were more likely than others to answer the questions correctly.  

More than 90 percent were aware that mortgage lenders and credit card issuers use credit scores, but two-thirds or more were also aware that landlords, insurance companies and cell phone companies also rely on the scores in making their decisions. 

Three quarters of the respondents were able to identify the major credit bureaus, and a large majority (89 percent or more) could identify the factors (missed payments, personal bankruptcy, and high credit card balances) that weigh most heavily in credit scoring formulas.

Younger consumers, between 18 and 35, who are most likely to rely on credit, also seemed to know more about credit scores, the survey found.

Particularly impressive and “somewhat surprising,’ Brobeck said, was the widespread understanding of “new and fairly complicated” consumer protections related to credit scores.  For example, between 70 percent and 80 percent of the respondents knew the three circumstances under which lenders using credit scores are required to disclose them to borrowers.  

Brobeck attributed the improvement partly to publicity surrounding the new protections and to more aggressive efforts by CFA and other advocacy groups to educate consumers about credit issues generally and credit scores in particular. 

But the survey also identified gaps in some key areas:

  • Only 29 percent are aware that consumers with lower scores will pay more, and possibly a lot more, for credit. 
  • Fewer than half (44 percent) understand that a credit score typically measures repayment risk; 22 percent thought it measured a borrower’s debt load and 21 percent the borrower’s other financial resources.  
  • More than half still think age and marital status influence the credit score and 21 percent think ethnic origin is a factor.
  • Only 9 percent are aware that know that multiple inquiries during a short period will lower a credit score, but more than one third believe (incorrectly) that isolated individual inquiries will have that eff
  • More than half agreed with the statement that credit repair companies are "always" or "usually" helpful in correcting credit report errors and improving scores, despite considerable evidence to the contrary.   

BAD BUSINESS

Unfair deceptive credit card practices harm the lenders using them as well as the consumers misled by them. That’s the conclusion the Center for Responsible Lending draws from a study finding that credit card issuers using practices that are now largely prohibited suffered steeper losses than those with more consumer-friendly practices. In particular, the study found that the penalty fees and interest rate increases lenders said were needed to reduce their credit risks actually increased their risks instead, pushing many borrowers into defaults they would otherwise have avoided. 

The study, “Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders,” examined more than 20 marketing and pricing practices commonly used by the top 100 credit card issuers before the Credit Card Accountability, Responsibility and Disclosure Act (CARD) was enacted in 2009.  Its primary conclusion:  “Bad practices are a better predictor of consumer complaints and an issuer’s losses during a downturn than an institution’s type, size or location.”

Consumer safeguards, which lenders argued would impede profitability, actually strengthened the finances of credit card issuers, according to the study, which also found no evidence that larger numbers of lower-income (and presumably “higher risk”) customers caused larger losses during the downturn.  “Having more high-risk customers did not predict which company’s problems would grow fastest,” the study found. 

The study’s findings about the counter-productive impact of penalty fees and rates apply equally to overdraft and payday loans, the CRL study suggested, warning, “These charges—like their predatory cousins in credit card lending—don’t reflect a borrower’s risk of default, but are the risk that too often pushes a customer into financial hardship or default.”