State attorneys general are still trying to hammer out an agreement with lenders and loan servicers to resolve complaints about their questionable foreclosure procedures, but rifts among the AGs and a side-settlement crafted by federal bank regulators appear to be impeding those efforts.
The rift, hinted at privately for months, surfaced publicly when Republican AGs in several states balked at making stiff fines (totaling more than $20 billion according to some reports) and mandatory principal reductions part of the settlement.
Oklahoma Attorney General E. Scott Pruitt told the Washington Post recently that he has “asked my attorneys to prepare me for an option that does not require that.”
At least seven other AGs have complained similarly that the proposed settlement exceeded the authority of state regulators, interfered improperly with the financial markets and risked “moral hazard” by rewarding borrowers who had defaulted on their loans and encouraging others to follow suit.
In a letter to Iowa AG Tom Miller, who is heading the coordinated 50-state investigation of foreclosure practices, the dissident AGs said the proposed settlement “appears to reach well beyond the scope of our enforcement role, and, in some instances, far exceeds the scope of the misconduct which was the subject of our original investigation.” AGs from Georgia, Texas, Florida, and South Carolina signed that letter; their counterparts from Oklahoma, Alabama and Nebraska made similar arguments in a separate letter to Miller.
Responding to those concerns, Miller denied that principal reductions are part of the proposed settlement. “Our position has been that principal reductions are one tool in the toolbox, and should only be used in appropriate circumstances,” Miller said in a press statement. “We have never advocated broad-based principal reductions that would pick winners and losers or trigger strategic defaults,” he insisted.
As the unified state foreclosure investigation showed signs of becoming less unified, federal bank regulators announced that they had negotiated consent decrees with 14 of the nation’s largest loan servicers resolving complaints about abusive foreclosure practices. Although the consent order does not impose any fines, the regulatory agencies have said penalties may be imposed later.
“There will be civil money penalties,” Acting Comptroller of the Currency John Walsh, told reporters. “The question is timing and amount. But we’re not letting that clock run forever.”
The consent decree does requires the institutions involved to review foreclosures initiated in the past two years and compensate owners whose foreclosures were handled improperly. The institutions have also agreed to improve their foreclosure and loan modification procedures, evaluate modification requests before initiating foreclosure actions, hire sufficient staff to process foreclosures, and provide a single contact for borrowers throughout the loan modification and foreclosure process.
Consumer advocates and some legislators have complained that the enforcement action lacks teeth, allows lenders to police themselves and undercuts the effort of state attorneys general to negotiate a more far-reaching and more punitive settlement.
“The biggest stick in this fight is just settled,” Jaret Seiberg, a banking industry analyst, told the Wall Street Journal, “so there’s going to be a lot less pressure on the banks to agree to a radical resolution to resolve the state complaints.”
Walsh, speaking for the regulators, insisted that the enforcement orders, in fact “require substantial corrective actions. The banks are going to have to do substantial work and bear substantial expense to fix the problems we identified” and to compensate borrowers found to have been harmed by improper foreclosures.
Miller, the Iowa Attorney General, meanwhile, dismissed suggestions that the federal enforcement orders will impede the ongoing state investigation. “The agreements will not limit our pursuit of remedies and reforms,” he told the Wall Street Journal, adding, “this doesn't change what we are doing. We are moving ahead full speed."
A SEPARATE PIECE
Federal lawmakers, convinced that the consent decree federal regulators negotiated with loan servicers doesn’t do enough to address foreclosure abuses or to assist homeowners struggling to hang on to their homes, are proposing legislative remedies of their own.
This long (and expanding) list includes Rep. Maxine Walters (D-CA), who is re-introducing a revised version of a bill she has submitted in the past that would require lenders to undertake “reasonable loss mitigation activities” before foreclosing on delinquent homeowners. Dismissing the enforcement order regulators have imposed on the largest loan servicers as little more than “a slap of the wrist,” Waters said Congressional action is “the only way to protect homeowners and prevent foreclosures.” Her bill also requires lenders to reduce the principal balance on underwater mortgages and to coordinate modifications of first and second liens.
Waters’ legislation is one of several bills aimed at overhauling and standardizing loan servicing procedures. Rep. Elijah Cummings (D-MD) and Sen. Jack Reed (D-RI) have introduced companion bills in the House and Senate that incorporate some provisions of the consent order (barring lenders from foreclosing while negotiating modifications for example) but go further, limiting foreclosure-related fees, creating an appeals process for borrowers whose modification requests are rejected, and requiring lenders to produce documentation verifying their right to foreclose.
Companion measures introduced by Sen. Sherrod Brown (D-OH) and Rep. Brad Miller (D-NC) target similar goals with an array of additional reforms. Their Foreclosure Fraud and Homeowner Abuse Prevention Act would:
- Require servicers to negotiate “sustainable” loan modifications when that solution “is in the investors’ best interests and create a borrower defense against foreclosures when servicers fail to offer modifications.
- Require lenders to mark to market loans that are more than 120 days delinquent that have not been modified.
- Entitles borrowers who are 90 or more days delinquent to principal reductions “where it is economically beneficial to all investors.”
- Require servicers to apply borrower payments to scheduled principal and interest charges before applying them to fees. Diverting payments can create a cascade of late fees and “drive some homeowners into default,” the summary of the legislation notes.
- Require servicers to give borrowers a monthly statement detailing the payment amount and due date (including when payments must be received to avoid late charges), listing payments received and explaining how they have been applied.
“It is clear that the current system isn’t working and unfortunately federal regulators have failed to bring meaningful reform to the mortgaging servicing,” Sen. Brown said in a press statement introducing his bill. “Ending the foreclosure mill requires stronger oversight, streamlined modification procedures, and meaningful penalties when servicers break the law.”
A divided Supreme Court has ruled that Congressional bias toward arbitration trumps state laws preserving the right of consumers to pursue class actions. That 5-4 decision overturned lower court decisions prohibiting AT&T from enforcing a mandatory arbitration provision in its cell phone contract. The consumers in the case (AT&T Mobility v. Concepcion) had sued the company, challenging a $30.22 sales tax charge for a cell phone the company had advertised as “free” when purchased in conjunction with a service contract.
Both the district court and California’s Ninth Circuit Court of Appeals found the arbitration requirement “unconscionable” because it improperly barred class action proceedings specifically protected under California law. But the High Court found that the Federal Arbitration Act, requiring arbitration, preempts the state law.
Writing for the slim majority, Justice Antonin Scalia argued that while arbitration requirements can be deemed “unenforceable” in some cases under the federal arbitration law, the escape hatch created by the statute’s “savings clause” does not give states “free rein to adopt policies that discriminate against arbitration or interfere with its central mechanisms.”
The class arbitrations the California law protects are unwieldy and less efficient than individual arbitrations, rendering the process less appealing and thus thwarting Congressional intent, the majority opinion said.
Attorneys representing corporations said the decision benefits consumers by preserving “an efficient, low-cost” alternative to litigation. “If those claims could easily become sprawling class actions, what business would include an arbitration clause in its contracts,” Jack Pace, III, an attorney with White & Case, asked in an interview with the National Law Journal. “You would get none of the procedural protections of a court of law, but all of the risks of a class action.”
Consumer advocates, on the other hand, said the decision represents a “crushing” defeat for consumers, making it harder for them to pursue small claims against large corporations. The decision “has the potential to result in virtually no consumer or employee cases involving small claims being heard anywhere,” Gibson Vance, president of the American Association for Justice, told the NLJ. “Corporations will now be allowed to get away with sweeping wrongdoing, particularly where the damages would be too small to justify pursuing individual claims,” he added.
Vance and other consumer advocates say the High Court decision underscores the need for Congress to enact legislation prohibiting mandatory arbitration clauses in consumer contracts.
In a closely related development, the High Court has agreed to consider another arbitration issue, this one involving a mandatory arbitration provision in a credit card contract. The question here is whether the Credit Repair Organization Act, which specifically allows consumers to sue entities that violate the statute, trumps the credit card contract’s arbitration requirement. Once again, the Ninth Circuit has sided with consumers, concluding that “Congress meant what it said in using the term ‘sue,’ and that it did not mean arbitrate. Perhaps,” the court added somewhat snappishly, “the question is as Alice put it: ‘whether you can make words mean so many different things.’”
SPOTTING STRATEGIC DEFAULTERS
Responding to concerns about “strategic defaults” by homeowners who walk away from underwater mortgages they have the ability to repay, the credit-scoring firm Fair Isaac Corp. has developed a method for identifying borrowers who are likely to make that decision.
Instead of using a loan’s underwater status as the primary risk factor (a less than useful marker, with 25 percent of outstanding mortgages in the underwater category), the Fair Isaac model recognizes that strategic defaulters are likely to be more savvy financially, have higher credit scores and lower overall debt levels than underwater borrowers who do not default.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting…because they believe it is in their financial interest, and because they believe the consequences will be minimal,” Andrew Jennings, chief analytics officer at FICO, explained in a press statement. FICO officials say 67 percent of the borrowers their model identified as highest risk ultimately became strategic defaulters.
Not everyone finds FICO’s approach convincing. Writing on “Wallet-Pop,” financial columnist Lynnette Khalfani-Cox notes that while strategic defaulters as a group may, in fact, be more likely to view their homes as an investment and see default a business judgment rather than a moral lapse, “it is a major leap for researchers to assume that strategic defaulters definitely have the ability to repay their loans.”
A major flaw in First Isaac’s study and others like it, Khalfani-Cox argues, is their failure to track the income of borrows or liabilities that might affect their repayment ability.
Researchers are assuming that because borrowers are paying other bills, they have the ability to pay their mortgages, too. But that’s not necessarily true, Khalfani-Cox says. “Just because their financial pain isn’t showing up in the research on strategic default doesn’t make it any less real,” she notes. Until researchers drill down and analyze the financial circumstances of strategic defaulters – until they “delve into the human side of strategic defaults,” Khalfani-Cox contends, “they’re really just guessing about who’s a strategic defaulter, not to mention who’s likely to default and why.”
BAD PRESS BUT GOOD REVIEWS
Media coverage of the banking industry hasn’t been particularly flattering, to say the least, since the financial meltdown, but bank customer satisfaction ratings are improving, nonetheless. In the most recent annual survey conducted by J.D. Power and Associates, banks scored 752 — 4 points higher than last year and the first time since 2007 that the index has moved up.
Power cites improved disclosure (mandated by financial reform legislation) and better branch-level customer service as the primary reasons for the gains. The survey found that customers are angry about the new fees financial institutions have imposed to offset revenue losses resulting from regulations on credit and debit cards. But it also found that banks have offset some of that blowback by offering new services, such as free online banking and mobile banking services that have proven popular with their customers. Better disclosure of the fees they charge and the perception of enhanced “transparency” has also garnered favorability points from consumers.
The latter point – improved transparency – seems to contradict the findings of a separate survey by the Public Interest Research Group (PIRG), which found that only 38 percent of the more than 300 banks tested provided fee schedules immediately on request, as federal law now requires. The compliance rate rose to 55 percent on second request, but nearly 25 percent of the branches flatly refused to comply and about the same number provided inaccurate information.
Although some of the banks provided the fee information more willingly – or at least, less grudgingly – than others, PIRG’s “secret shoppers” reported, none offered consumers easy access to the information and many required shoppers to sit through a “sales pitch” before providing the pricing information requested.
PIRG offered several suggestions to consumers seeking transparency and competitive pricing, among them: “Bank at a credit union, not a bank. Average interest rates for loans are lower at credit unions…and average rates for deposits are higher,” the report notes. “That is a better deal both ways.”