Perhaps those of us who have studied and taught consumer protection law are as much to blame as the banks and regulators for the mishaps of the recent past: we were too quiet while they made the mistakes that led to the economic crisis. We law professors have learned from our mistakes. We hope Congress has, too.

Check out this article in today's Washington Post by Jeff Plungis concerning proposed federal legislation on bank overdraft fees. The article's focus is on legislation championed by Rep. Barney Frank that would make overdraft protection on debit cards available on an opt-in basis only. Right now, some banks enroll customers in overdraft protection on debit cards without their consent and then charge nearly $40 after a customer makes a purchase when the customer's account lacks sufficient funds to cover the purchase. As Frank puts it:

We wouldn't be in a situation where we're considering legislation if you would have had an opt-in regime from the beginning. Don't do people favors without asking them.

By Alan White

October’s mortgage securities investor reports are out and the news is discouraging.  The foreclosure inventory is unchanged and modifications are still down from earlier this year.  There is little evidence that Treasury’s Home Affordable modification program is yielding more permanent modifications than were being done before.  We’ll know more when Treasury releases their October numbers in the second week of November.

The data also continue to show wide random variation among mortgage servicers.  Some are modifying a lot, and some are foreclosing a lot.  The chart above shows raw numbers of modifications and liquidation sales from the October (9/25-10/26) Columbia collateral file (not all servicers are represented), which covers about 5% of mortgages and 20% of foreclosures nationally.

For this month’s update I also looked at how different states fared in good and bad outcomes.  The second chart shows the number of modifications and final foreclosure liquidations (resales after foreclosure) in the October Columbia report.  The “sand states”, CA, NV, FL and AZ, all show higher rates of post-foreclosure sales and lower rates of modifications.  Pennsylvania, North Carolina and New York are the only states with significantly more modifications than post-foreclosure sales.  Perhaps this is some indication that the aggressive mediation programs in those states are working.  Affordable home prices might explain Pennsylvania, but perhaps not New York or North Carolina.

This article examines the failure of the current regulatory structure to adequately protect consumers against risks in a home mortgage lending market characterized by complexity and limited transparency. It explores the reliance of bank regulators, particularly the Federal Reserve Board, on market discipline to control risks and the failure of market discipline. It also explores the Federal Reserve’s view that market intervention is only justified based on net societal benefits. This is a viewpoint that prevented regulatory intervention until the financial sector was in crisis, and a viewpoint that is at odds with the view of the Congress. This article urges a rejection of the net societal benefits standard as the determinant of regulatory intervention in the mortgage market.

Annual reverse mortgage volume has topped 110,000 units and $17 billion, with top banks like Wells Fargo and Bank of America and large insurance companies like Genworth and MetLife leading the way. Despite a slowdown in originations due to the recession, reverse mortgage originations in 2009 still continue at a record pace.

Mortgage brokers see it as a new source of rich fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors. And securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry.

To see the report on NCLC's website, click here. 

“Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior,” (Oct. 2009) (50 pp.) includes a detailed examination of loans in foreclosure from 1995-2009 and how components of servicer compensation affected the likelihood and speed of foreclosure. It also looks at oversight of servicers by credit rating agencies and bond insurers, and how that oversight too often encourages servicers to foreclose.

Among the report’s findings are that “Loan modifications inevitably cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed.”  The report also found that servicers often deny homeowners principal and interest rate reductions because as servicers they find it profitable to offer repayment plans or forbearance agreements that do little to reduce homeowners’ debt burdens.

The report is found on NCLC's website and by clicking here.

More than 25 states and localities are using mediation programs of various kinds to address the foreclosure crisis.  These programs assume that many foreclosures could be prevented if only the servicer and homeowner could break through all their communication problems and talk until they reach an agreement.  Homeowners won't return calls, the mortgage industry complains, and if only we could talk, we could work it out.

A new study of 800 settlement conferences held in New York City in June and July 2009 found that homeowners came committed to serious negotiation, and in nearly half of the cases with documents and/or having made a loan modification proposal.  Servicer attorneys, on the other hand, came to conferences without settlement authority, without documents and without knowing the servicer's settlement position or even the status of a modification request.   

The National Consumer Law Center's report on state mediation programs points out the limitations of voluntary conciliation programs that do not require mortgage servicers to participate in good faith.  Very few mediation programs deny foreclosure relief until the servicer has completed a modification analysis and explained their decisionmaking.  The mounting evidence is that servicers do not provide timely and accurate responses when homeowners seek foreclosure alternatives.  It will be interesting to see Treasury Department reports on servicer compliance with HAMP Directive #7, which calls for homeowners to have their modification request acknowledged in 10 days and decided upon in 30 days.

Among other things, the Fair Credit Reporting Act gives consumers the right to dispute inaccuracies on their credit reports and to have the reports corrected. That's a good thing because credit reports are amazingly inaccurate. So, you'd think that there'd be no punishment for disputing your credit report.Think again. This article in today's Washington Post explains that the fact that a consumer has disputed her credit report can undermine her ability to get a home loan, even when the consumer was correct in the dispute. Am I misreading this article?

The Citizen Media Law Project carries word of a ruling by a Tennessee Circuit Court judge in Schwartz v. Doe (October 8, 2009), which ordered identification of Doe defendants but only after adopting a tough legal standard that follows New Jersey's Dendrite v. Doe ruling closely in requiring notice, an opportunity to respond, a showing of legal sufficient, as well as evidence of wrongdoing, and  then applying an express balancing test once the other aspects of the test were met.  Court declined to take a position on “summary judgment” versus “prima facie case” as a formula for applying this prong of the text, but says the point is to make sure that there is a “substantial legal and factual showing that the claims have merit before permitting discovery of an anonymous defendant’s identity.” 

The Court notes that it gave the Doe permission to file an anonymous affidavit, but that the Doe then failed to take advantage of that permission.  The plaintiffs established their factual basis by testifying at a hearing and being subjected to cross-examination.  This procedure is reminiscent of the process used by Judge Wettick in Melvin v. Doe, which led to the Pennsylvania Supreme Court's decision on the appealability of such rulings -- Judge Wettick allowed plaintiff to present her evidence by affidavit, but allowed Doe's counsel to take her deposition.

There is one odd item in the balancing, discussion, however.  The court mentions the fact that Google's Terms of Service refer to the possibility of disclosure pursuant to subpoena.  The court does not acknowledge that most if not all ISP's have terms of service that reserve the possibility of disclosure of information pursuant to a valid subpoena.  If that is so, it is hard to understand why the fact that Google is one such ISP should a a role in the balancing of interests that should help courts to distinguish cases especially meriting disclosure from those especially meriting protection of anonymity.

Besides having a world-class orchestra and  baseball team, and stunning Art Deco hotel for this week's National Consumer Law Center conference, Philadelphia boasts a wonderful legal community that continues its extraordinary collaborative effort to tackle the foreclosure crisis.  This afternoon I stopped by now-famous room 676 City Hall weekly foreclosure court. Out of about 80 new judicial foreclosure filings scheduled for mediation conferences where the defendant was served, about 60 defendants actually showed up and began the process of negotiating a resolution.  A 75% response rate from foreclosure defendants is amazing, as any counseling agency, hotline or mortgage servicer will attest.  The key to Philadelphia's success is a combination of aggressive outreach and mandatory, automatic scheduling of conferences in every new foreclosure case.  Whenever a new foreclosure is filed for an owner-occupied home, the plaintiff serves the homeowner with a court-generated case management Order scheduling a date, time and place for the mandatory conciliation conference.

A quick look at mortgage investor reports reveals that Philadelphia is well ahead of the nation in foreclosure prevention.  In the month of September 2008, about 4% of Philadelphia mortgages in foreclosure were liquidated and sold by servicers, compared with a 12% foreclosure liquidation rate for the month nationwide.  Meanwhile modifications that month amounted to nearly 10% of Philly mortgages in foreclosure, compared with 7% nationwide. 

The success of the Philadelphia program is not due merely to good intentions.  The City government, bar association, legal services programs, housing counselors and court system have joined together to do the necessary outreach, staffing of weekly mediation conferences, follow-up and the tedious work of getting mortgage servicers to yes.  The system is not free; good mediation and foreclosure prevention costs money, for counselors, lawyers, mediators, and court time.  It also requires a community commitment to results, shared by lawyers for servicers and borrowers and the judicial system.  Makes me proud to be a Philadelphia lawyer. 

USA Today recently reported that the Fed has decided to require banks to have consumers affirmatively opt in before paying overdrafts and charging hefty fees, based on Wednesday's testimony.  The Wall Street Journal also announced the Fed's decision.  I watched the video of the exchange between Senator Shumer and governor Tarullo, and did not hear the governor announce any decision on the opt-in/opt-out issue.  On the other hand, given the intense pressure to demonstrate some consumer protection moxie, or lose jurisdiction to the proposed CFPA, it would not be surprising to see the Fed opt consumers out of expensive bounce loans, and require banks to get them to opt back in.