Yesterday, the American Banker reported that Chase has stopped filing lawsuits to collect consumer debtors. Moreover, they did it quietly and quickly. With concerns over sloppy procedures in debt collection, akin to the robo-signing problems in the mortgage industry, this news was quite interesting.
H/t to our reader who pointed me to the story.
The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.
One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1) About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.
In many states, a creditor or debt collector can easily obtain a default judgment with just a person’s name, last known address and Social Security number, and the judgment can follow the person around for years despite that the debt was never proven. Due to a flood of uncontested debt collection cases in Maryland, its high court has just ruled that for all cases filed on or after January 20, 2012, collectors and creditors must produce actual proof that the debtor incurred the debt. This can be done by producing a copy of a signed bill or contract, or other evidence of the debt. Debt buyers also must prove they actual hold the debt through a valid purchase, a common stumbling block for collecting debt buyers. In making this decision, the Maryland Court of Appeals (which is Maryland’s high court) took into consideration that many cases end in default judgments, a problem Nationwide. The decision also evidences a distrust of those pesky (often fraudulent) affidavits. Let’s hope other states decide to follow suit and put collectors to their proof.
As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?
Continue reading "The Value(s) of Foreclosure Law Reform?" »
Although debtors' prisons are illegal across the country, you can apparently still end up in jail for an unpaid bill. I first came across this reality reading one of Lea Shepherd’s (Loyola Chicago) law review articles, Creditors Contempt. NPR tells the story of Illinois debtor Robin Sanders in Illinois, who was stopped by police for a loud muffler but taken directly to jail on an arrest warrant for failure to appear at a hearing on an unpaid medical bill, all in a lawsuit she was unaware of. Similar stories have been reported in Indiana, Tennessee and Washington, and all involve selling debt to a collection agency, that then files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest. According to the story, despite that debtor’s prisons were outlawed early in our country’s history, one-third of all states still allow people who have not paid bills to be jailed.
Continue reading "NPR Reports that Debtors' Prisons Are Alive and Well" »
The WSJ reports on the latest development in the implementation of the OCC's mortgage servicing fraud consent orders. It seems that the banks will have OCC approved "independent" foreclosure review consultants (chosen and paid by the banks) review foreclosure files from 2009-2010 and pay homeowners damages if there are any problems found.
This proposal really worries me. It's hard to imagine that the banks will part with any money unless they receive releases--broad releases--from the homeowners. The homeowners, however, will not typically have legal representation and will lack the ability adequately value their claims against the banks. $100 for a complete release? Why not?
Continue reading "OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?" »
We have two married 60-something friends who are artists in Santa Fe and own a very simple home with a rental house in the front. The house is tiny by all but New York City standards, and since their income is always in flux (some months several grand, many months nothing at all), they live very close to the bone. No credit card debts, no car payments, no mortgage. The only fixed expenses they have are their $1,000 a month health care policy and a few utility bills. Generally, they get along just fine, but last month, when he ended up in the hospital for 5 days for literally swallowing wrong.
Somehow, they now allegedly owe $30,000, despite the expensive health care policy. I know, there is supposed to be a $5,000 deductible limit per person, but there is something about a pre-existing condition etc. etc. She called to ask: “they can’t take our house to pay a hospital bill, can they?” Given its location, this property is worth a lot, so we all know the answer.
Now I know that no one exemption scheme can work for everyone, but these people have done everything right. They have lived a Dave Ramsey debt-free life, and while they could have saved more in traditional retirement vessels, they relied on Santa Fe’s outrageous real estate values to set them up for life. So I ask you, are our exemption policies out of sync with reality? Do they work for most people most of the time? I am suddenly dubious.
Story here about debt collectors using pseudonyms because of the abuse they get. I don't doubt it. Debt collectors aren't exactly popular folks. I was recently searching for cartoons of various consumer finance topics and there were by far the most about debt collectors, none flattering. But I don't think that makes it ok for a debt collector to use a pseudonym.
I think using a pseudonym might itself violate the Fair Debt Collection Practices Act. The FDCPA prohibits "any false, deceptive, or misleading representation or means in connection with the collection of any debt," including "The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer."
I'm not sure that a consumer is likely to be harmed in any way by a debt collector using a pseudonym like John Smith, but perhaps use of a pseudonym emboldens debt collectors to be more aggressive. Remember, the Fair Debt Collection Practices Act has multiple provisions to protect debtors from abuse by debt collectors. (Hey, there's that "abuse" term that has everyone so worried in the Consumer Financial Protection Act...)
Of course, there's a wee enforcement problem--how does one know if a debt collector is using a pseudonym, unless it's something like "Barack Obama"? (Impersonating a government official is itself an FDCPA violation.)
The other shoe drops: allegations of robo-signing in credit card collections (courtesy of the AP and CNBC). If it is happening in assembly-line mortgage foreclosures, there is no reason to think it is not happening in other assembly-line debt collections.
[Updated 3.8.11]
Some bloggers on the left (e.g. here) and on the fringe right (see here) are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal. This is an incorrect reading of the term sheet. Let me give three examples.
Continue reading "Foreclosure-Gate Settlement--More Thoughts" »
What appears to be part of a Foreclosure-gate settlement has been leaked. There's a lot in this 27-page document, but here are some initial thoughts.
The inter-regulator fight over the proper parameters of a foreclosure fraud settlement are really highlighting the changes in the financial regulatory world. What we're told is that the OCC and Fed are urging a weak settlement, while FDIC, the state AGs, and the Consumer Financial Protection Bureau (CFPB) are pushing for a serious settlement.
Parts of this line up look quite familiar, but parts are new and exciting.
A new amended class action complaint filed on behalf of Chapter 13 debtors, with their Trustee as additional plaintiff, describes in exhaustive detail the business of Lender Processing Services and its network of creditor attorneys and mortgage servicers. The gist is that LPS sells the dominant software product to mortgage servicers, and the software is designed to refer all foreclosure and bankruptcy cases to LPS-affiliated firms, which then share legal fees earned by litigating stay motions and claims in bankruptcy with LPS companies. In the process, LPS firms and their nonattorney employees allegedlly produce robosigned missing mortgage assignments and bankruptcy court filings.
This colorful pleading describes LPS as Mephistopheles and the participating law firms as Faust. Some of the practices are familiar, thanks to Judge Sigmund's decision in the Taylor case, discussed here previously. LPS and its affiliates, of course, vigorously dispute all allegations and claim that their business is perfectly legal, and does not constitute unauthorized practice of law, although their SEC filings are considerably more ambivalent on the latter point.
More details on this and related litigation are available in this detailed report.
A few months ago, after the robosigning scandal broke, the banks assured us that they had done a thorough review of their foreclosure processes and everything was in order. I seem to recall JPMorgan Chase's CEO Jaime Dimon stating in an Oct. 13, 2010 earnings call, "for the most part by the time you get to the end of the process we're not evicting people who deserve to stay in their house." Thus, by mid-fall, the banks had sounded the all clear sign, and said it was safe to go back in the waters.
And yet now we learn that JPMorgan Chase has been engaged in wide-scale violations of the Servicemembers Civil Relief Act, including overcharging active duty military members on their mortgages and wrongfully foreclosing on their homes. That's a lot of egg on JPM's face right now. I guess, given the scope of JPMorgan's foreclosures, Dimon's "for the most part" statement is true, but it hardly instills confidence that our foreclosure process is working properly.
Banking is a business based on trust, and the farther we go down the foreclosuregate rabbit hole, the harder it becomes to believe the banks. How many times are we going to keep believing the "there's nothing to see here folks" line? Can we trust Jaime Dimon when he tells us that the situation is under control? What happens to our financial institutions when they lose their credibility with the public?
Footnote: anyone want to specultate on whether JPM as a servicer is liable for FDCPA violations? How about FCRA?
Not too surprisingly, people are less likely to want to pay a debt that they can no longer be sued on. This fact has caused one state to require disclosure that a debt is time-barred, in order to comply with the state's unfair practices act. More specifically, the New Mexico Attorney General just released a rule requiring debt collectors to determine whether a debt is time-barred and to disclose this fact when collecting time-barred debt in New Mexico. The rule defines time-barred debt as "any debt that is not enforceable in a judicial proceeding because the applicable statute of limitations has run."A copy of the final rule, as well as the Attorney General's statement regarding adoption of the rule, is available here. For a little more information on how this came about, see this article by UNM psychology Professor Tim Goldsmith and I. We are thinking a few other states might follow suit.
In a case referred to as an “invasion of privacy on steroids,” a recent debt collector used Facebook to contact a debtor and demand payment of a $362 car loan. The company, Mark LLC out of Florida, told Melanie Beacham's family and friends on the social network site to have Melanie call them. Now Melanie is suing the debt collection agency for various violations of the Fair Debt Collection Practice Act, including the Facebook fiasco, calling her six to 10 times a day by phone, sending text messages, contacting a neighbor, and sending a courier to deliver a letter to her workplace.Beacham's attorney has asked a judge to prohibit Mark One from contacting her or her family through Facebook or Twitter.This is obviously not the first time Facebook has been used in this way. Jeffrey Hyslip, a Chicago lawyer, said he had one client who was friended on Facebook by a young woman in a bikini. The account turned out to be a debt collector's, something his client realized only when the "friend" posted a message on his wall: "Pay your debts, you deadbeat."
The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?
1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).
2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.
I have a new suggestion:
3. Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account.
Continue reading "Am I Paying for My House or the Brooklyn Bridge?" »
More Robo-news, this time robo- dialers. Allied Interstate Inc., a large Minnesota debt collection agency with a history of consumer complaints, has agreed to pay $1.75 million to settle federal allegations that it broke the law by trying to collect debts people didn't owe, according to the Minneapolis Tribune today. This is the second largest civil penalty the FTC has ever obtained against a debt collection firm. The suit brought, and the resulting settlement, send a message to the collections industry that repeatedly calling consumers who dispute a debt is not tolerated.
What are some other common collection infractions? Speaking to neighbors, co-workers or others about a consumer's debts, threatening legal action the collector does not intend to take, calling the wrong person, calling after being asked by a consumer in writing to stop calling, using foul language, and using "robo dialers," to automatically call the same people multiple times a day. With Allied, such calls continued even after people insisted the firm was calling the wrong person or that they did not owe the debt, the FTC alleged in a federal lawsuit.
Still, according to consumer attorneys, suits against collectors are few and far between and even this fine may not be enough to deter collectors. Quoting from the article above, attorney Peter berry of Minneapolis stated that the “fine levied for this relentless abuse of consumers is tiny compared to the profits this agency made over the years engaging in that abuse."
Bankruptcy filings have not risen at anything like the rate at which consumer debt defaults have risen since 2007. Part of the explanation may lie in the shadow bankruptcy system, a network of alternative service providers who purport to save debt-burdened consumers from the bankruptcy court. While consumers being sued on delinquent credit cards and mortgages receive solicitations in the mail from bankruptcy attorneys, they are also deluged with a variety of other offers of aid. These range from foreclosure rescue scams to a wide range of legitimate and dubious debt advice and counseling services, to debt elimination and debt settlement schemes. While pondering this post I searched in the usual places for any good empirical data on the number of consumers participating in non-profit counseling, or the number of customers enticed by those who promise to make debt disappear, with no success. We don't seem to know how many debtors go to these debt advice services.
There's a nice piece about debt settlement companies in the NYTimes.
The story left me wondering whether Ms. Robertson, who paid $4,000 to the debt settlement firm without getting any debt relief might have a fraudulent transfer claim against them. I recognize that it is far from clear whether such a suit would succeed; there is a REV question and an insolvency question at the very least, and the trustee might not want to litigate over what is at most a few thousand dollars in most cases. Yet especially for no-asset cases, the avoidance action might be the only real value available for creditors.
Does anyone know of fraudulent transfer suits being filed against debt settlement firms? Are trustees or creditors starting to inquire at 341 meetings whether the debtor has been making debt settlement payments? I'm curious to here whether practitioners have started to account for pre-bankruptcy debt settlement attempts.
Mark Budnitz at Georgia State University College of Law, in coordination with the National Consumer Law Center, is asking law professors to sign on to a letter supporting a proposal by Treasury and other federal agencies to mandate crucial protection for persons receiving federal benefits such as Social Security. Regular Credit Slips readers may remember that guestblogger Nathalie Martin's post on this problem, "Think Public Benefits are Exempt from Execution? Think Again." Prof. Budnitz succintly describes the problem. He writes:
"These funds are exempt under federal statutes. Congress intended the funds to be beyond the grasp of creditors. Nevertheless, these funds are routinely frozen and seized by debt collectors. When a debt collector obtains a judgment, it serves a garnishment order on the consumer's bank. The bank freezes the consumer's account; often the bank turns over the garnished amount to the debt collector without first giving the consumer any notice. Most banks simply honor the state court order; they do not examine the bank account to determine whether the funds are exempt. For consumers whose primary or sole income are federal benefit payments (e.g., Social Security, SSI, veterans benefits), the effect is devastating. The consumer often first learns of the bank's freeze when checks start to bounce. He or she has no money for food, medicine and other necessities. The proposed regulation would correct this problem. It sets out a clear, uniform procedure for banks to follow. It prohibits the freezing and the seizure of exempt funds."
Over twenty law professors have already signed on to Budnitz's letter. In addition to supporting the proposed regulation, it recommends a few improvements. If you are a law professor and you want to sign onto this letter, please contact Prof. Budnitz who will give you further information. Members of the public will be able to comment soon; instructions are here.
From the San Jose Mercury News, the headline says it all: "Repo man takes San Jose mom's car with 2-year old in back seat" (courtesy of The Consumerist). Now, a short essay from my Secured Credit final exam:
Cletus and Brandine Spuckler are in your law office and tell you the following tale of woe. They had borrowed money from the Burns Finance Company to pay for their 2007 Ford Expedition but have recently fell behind on their payments. Burns Finance Company has a valid, perfected security interest in the 2007 Ford Expedition. One morning, Brandine found that Cletus’s tractor was blocking the driveway when she needed to take two of their kids to preschool. Consequently, Brandine loaded the two kids in the Expedition, got the tractor keys from Cletus, backed the tractor out, then backed out the Expedition, and then returned the tractor to its place on their driveway. She left the Expedition running in the street, with the keys in the ignition and the kids in the backseat. While Brandine went back inside to return the keys to Cletus, an employee of Burns Finance repossessed the automobile, driving off in it with the kids in the back seat. The employee got about three blocks when he saw the kids, and he promptly returned the Expedition to Brandine, who was emotionally distraught having seen a stranger drive off with her kids. Since that time, both Brandine and the two children have been unable to sleep and are emotionally upset. Putting aside the question of any tort claims, do you think the Spucklers have any valid claims under the Uniform Commercial Code?
I based the question on Chapa v. Traciers & Associates, 267 S.W.3d 386 (Tex. App. 2008). Still, I thought I was making this up. Who knew?
Continue reading "Life Imitates Art (or at Least My Final Exam)" »
Most institutional lenders in the United States are not subject to usury laws. National banks can evade they by basing themselves in states without usury laws and exporting the laxer regulation to other jurisdictions. State institutions often find themselves exempt because of state banking parity laws. And usury laws are preempted for many mortgages by federal law (although originally the FHA eligibility rate cap--removed in 1983--served as a de facto federal usury law for many mortgages).
There's plenty to say (at another date) about whether usury laws are good policy. I want to raise a related legal question for discussion on the Slips: are debts held in securitized pools subject to usury laws?
This just in from our Tampa bureau: a debt collector threatens a debtor and his family, including the lovely threat "I'm going to f*** you up" if you don't pay. Abusive debt collection practices seem to be pretty widespread but are rarely the subject of much enforcement or litigation. This time it might be different because the debtor recorded the call. The debtor has filed a lawsuit against the creditor, Jacksonville Check Cashers. The Consumerist was all over this story as well as a local TV news channel which has the original audio.
Here's the catch -- it is not clear that this particular situation violated the federal Fair Debt Collection Practices Act (FDCPA). Although that law prohibits abusive phone calls and threats, it also defines a "debt collector" as someone who collects debts on behalf of another. In this case, it was an employee of the creditor, which the FDCPA specifically says is not considered collecting debts on behalf of another. Florida has its own state law, but it seems to have the same definition. Because the creditor was acting on its behalf, these laws do not apply. The bottom line is that a debt collector is not always a "debt collector" for purposes of the law.
That is not to say the debt collector and his employer will avoid any penalties. The actions might constitute an assault (but probably not) or intentional infliction of emotional distress (but what are the damages?). Maybe there are other causes of action under Florida state law? Similarly, there may be regulatory consequences from the state licensing authorities. It would be much better, however, if the debtor could enforce his rights under the debt collection laws. The whole episode is another reminder that it is time to revisit the FDCPA and bring it up-to-date with modern commercial reality.
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.
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.
The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:
All good points, but there is nothing that the ivory tower can't make more confusing.
Wow. I missed this one last week. New York Attorney General Andrew Cuomo has brought civil and criminal charges against lawyers and process servers who were abusing the debt collection system. From the New York Times article:
The cornerstones of due process are notice and a hearing. It sounds like these consumers were only getting half of that, and without notice that it is going to occur, the hearing does not do much good. From the press release, it sounds like the problem was with the process servers who are alleged to have knowingly failed to serve process. After serving process, the process server files an affidavit swearing that it was done. A false affidavit is akin to perjury, hence the criminal charges against some participants.
Hat tip to Brian Wolfman and Jeff Sovern over at the Consumer Law & Policy Blog for pointing the way to the story.
I teach my students that the days of the debtor's prison and the workhouse are long past; the only debt you can go to prison for are domestic support obligations. But it turns out that there's another jailable offense: failing to pay the court. The New York Times has a story about Florida's practice of issuing writs of bodily attachment or "blue writs" for failure to appear in court. The jail time under one of these writs is supposed to be at most 48 hours (plus a $20 fine!), but a study by the Brennan Center for Justice at NYU found that some individuals were imprisoned longer. Florida's state constitution (like many other state constitutions) specifically forbids imprisonment for debt (excluding fraud), and there's a line of US Supreme Court cases holding that the Equal Protection Clause bars imprisonment solely because someone is unable to pay a debt.
Technically it is jail time for failure to comply with a court order (much like failure to comply with a domestic support obligation); in that sense it's just plain old civil contempt. But the wide-scale use of civil contempt to force payment for court fees strikes me as novel. It's certainly been used before to effectuate things like turnover orders, but there's something very awkward about the courts in the role of creditor.
With all the problems in the mortgage industry caused by defaults, it's easy to forget that the traditional bugbear of mortgage lenders isn't credit risk, but prepayment risk. If a lender contracted for a 6% return and the loan is prepaid, there's a chance that the best return the lender can get now is say 4.5%.
As it turns out, prepayments can cause just as many problems for servicers as defaults. Recently, one of my relatives laid into me with this story about her problems getting her servicer to correctly credit her prepayments. The servicer has been crediting them all to interest, not to principal, so the loan balance isn't getting paid down (and the servicer is making more money that way, at the expense of the investors). What's worse, is that the servicer says it can't correct the problem because some of the prepayments were made before it acquired the servicing rights. And, the servicer says that if it corrected the problem, it would result in the account being listed as 30-days late and credit reported because the servicer did not make an automatic withdrawal one month because it treated the prepayment as a regular (but partial) payment (even though the total prepayments should put the loan way ahead on its original amortization schedule).
Put another way, the servicer is saying that they cannot produce an accurate payoff balanceand that if the homeowner demands one it will result in her being credit-reported incorrectly.
This aggrevating situation illuminates what a mess the mortgage servicing world is in. For all of the attention justly paid to mortgage servicing problems with defaulted homeowners and servicing fraud in the context of default, my relative's case makes me wonder whether the rot in the servicing industry extends all the way up the tree, to an inability to properly handle transferred servicing rights and an inability to properly handle prepayments.
And here's the real problem: consumers trust financial institution creditors to be competent and fair. They trust that balances are right, that APRs are properly applied, that amortization schedules are correct, etc. Without that trust, the entire system of financial intermediation cannot work. Financial institutions trade in trust. Absent that trust, every consumer would have to subject every credit card bill, auto loan bill, mortgage bill, and student loan bill, etc. to a forensic accounting. That would be astonishingly inefficient. We shouldn't want consumers to have to be so careful. It's one thing to expect consumers to look at their bills to make sure that there are no unauthorized line items. It's another to expect them to run interest and amortization calculations.
For the most part the system works, as it's all highly automated. But when it doesn't, the power imbalance between the financial institution and the consumer puts the consumer at a serious disadvantage. We really need a better system for resolving consumer disputes with financial institutions. I'm not sure what it is, but maybe the trick is to avoid the disputes by making sure the FIs get things right. The least cost avoider of the errors is the financial institution, and we should really have stronger incentives for FIs to get it right.
Martin Feldstein has been pushing a mortgage bailout proposal that has been getting some undeserved attention (see here and here, e.g.). Feldstein gets (here, and here) how central negative equity is to the economic crisis. Homeowners with negative equity have a reduced incentive to stay in their home if the mortgage is burdensome. Negative equity fuels foreclosures, which in turn force down housing prices, setting off a downward spiral. Feldstein is right to focus on negative equity as a key issue for housing market stabilization. The problem is in his solution--it is based on a few erroneous factual premises, all of which could have been discovered with very limited Google searches.
TruTV has a reality series called Operation Repo. Basically they follow around a crew of brawny, heavily tattooed auto reposessors (men and women) in the San Fernando valley. Drama and hijinks ensue.
I'm sure they only show the more dramatic repos on TV (and I found the show strangely compelling, especially to see how a lot of the time the repo crew gets tips about auto whereabouts from disaffected family members), but what I was most struck by was how often the repos "breach the peace." People are routinely getting pepper-sprayed or shoved or put into headlocks as they try to stop the repo actions. Occasionally someone pulls a gun on the repo men, and they back off.
My secured credit class spends a tiny bit of time on repos, but the show is a vivid reminder that practice and law (repomen can't breach the peace) are very far removed. I think it's safe to say that the law of repomen is law of the jungle.
It's that patriotic time of the year when we celebrate our shared bond as American residents. It's the season for community celebrations, parades, and ice cream socials. Attending such events gives us a common experience, a shared reference point for what it means to live in America. Apparently, struggling to pay your bills is also part and parcel of being an American. An April survey showed that 52% of households had taken money out of savings, retirement accounts or investments in the last year to pay for necessary living expenses. The number is up from 43% when an earlier survey was conducted in October.
Other evidence shows that Americans have low confidence in their financial prospects. The Pew Research Center found that for the first time in a half-century of polling, more than half of Americans feel they either haven't moved forward or have fallen backwards in the last five years. The number of those who say they are better off has dropped to a record-low of 41%--and that was in back in late January/early February before the collapse of Bear Stearns, gasoline prices at $4 per gallon, and another preciptious drop in the stock market. Nearly 8 in 10 Americans (79%) say that it is harder for people in the middle class to maintain their standard of living. Such pessissim won't stop the fireworks on the 4th of July but financial pressure is an increasingly common part of middle-class life experience.
The luncheon speaker for the conference was James. D. Scurlock, the director and producer of Maxed Out, which airs this month on Showtime. For those of you who haven’t seen the documentary, it’s a scathing, eye-opening depiction of how the financial services industry (most notably, credit card issuers, debt collection agencies) treats ordinary, hardworking Americans and how people are seduced into debt. He expressed his gratitude to the sponsors for inviting him to a conference where he was sure his talk wouldn’t be the most depressing.
My semi-favorite debt collector, er, I mean arbitration service, the National Arbitration Forum (NAF), has been sued by the San Francisco city attorney. The San Francisco Chronicle reports the story here. Different contributors have discussed the NAF here on Credit Slips (see here, here, here, and here), noting the high win rate for creditors and describing how the NAF acts almost as if they are a disguised debt collection agency. According to the article, the lawsuit makes very similar allegations against the NAF.
The lawsuit also names Bank of America as a defendant, which makes me wonder if that part of the lawsuit (not the part against the NAF) will be preempted under the Supreme Court's Watters decision from last spring (see here).
Katie Porter's posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question: why aren't states reconsidering non-judicial foreclosure? Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses. And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure. But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.
[UPDATED LINK 3.4.08 at 5:06pm]A thank you to one of my students, Scott Wilson, for pointing me toward yesterday's front-page article in the Wall Street Journal about the growing phenomenon of "civil demand" that retailers are using against shoplifters. It was a new topic for me, although I am sure some Credit Slips readers were aware of it already. The article is worth reading.
It's very difficult to get people to see what is wrong with this system. No one could responsibly argue that shoplifters should not be held responsible for their actions and make restitution to their victims. What I see in this article, however, is troubling. It's the same pattern with the broader debt collection system, a system where a few abusive private actors essentially have become a law unto themselves. Their threats against uninformed consumers become shakedowns where the consumers have no choice but to pay.
This is not an indictment of debt collectors generally. Some of my best friends are debt collectors. Hey, I even did a few debt collections myself when I was in practice. The debt collection industry needs to stop its own bad actors before they get more regulation.
One of the hardest things about teaching debtor-creditor law is keeping up with all the market innovations. Subprime mortgages are in the spotlight, but credit card debt has not subsided. Last quarter credit card grew at a rapid 9.3%. For families looking for a way to get off the debt treadmill without declaring bankruptcy, a new industry has been born: debt settlement companies. These businesses promise to negotiate some debt write-down with the creditors. But the negotiators too often take a customer's money and offer little relief.
The industry is growing rapidly, but there are no regulations, no industry standards, and no one to turn to for help if the customer gets cheated. Will this become the next path to bankruptcy--a family hit a rough spot, faced a double-digit rise in interest rates, went to a debt consolidator, then ended up in bankruptcy with even more debt and fewer assets?
Under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692d(2), creditors are prohibited from using "obscene or profane" language in collecting debts.
Or is truth an absolute defense?
(Thanks to students in my bankruptcy class for bringing this article to my attention.)
The latest uproar about mortgage servicing in bankruptcy is an admission by Countrywide that it "recreated" documents related to the servicing of a consumer's home loan. The short story is that Countrywide says a debtor's monthly mortgage payment changed during the Chapter 13 plan and that the debtor didn't make the increased payments. The problem is that the debtor, her attorney, and the trustee say that they were never told about the increase in payments, which is purportedly due to changing escrow requirements. Countrywide gave the debtor letters showing that the amounts changed; those letters were dated 2003, 2004, and 2007. The problem is that those letters were not copies of actual letters from 2003, 2004, and 2007. As Countrywide admitted, it "recreated" these letters as "evidence" of the change in the monthly payment. The judge had a few questions about that practice:
Continue reading "Mortgage Magic--Recreating Servicing Documents" »
I have been telling my students this for years. Perhaps you have too. 42 U.S.C. § 407(a) says social security and other public benefits are free from the claims of executing creditors, but for many people that is true only on the books, not in real life. Why the disconnect? Because right now, under current law and regulations, banks are under no obligation to check to see if the money in a bank account comes from social security or disability payments before allow a garnishment to go through. This is true even if the only funds in the account are wired there directly from the government and are marked SSI or SSA. In fact, banks say they must comply with any garnishment order, even if the funds are obviously exempt. Of course, they also make a bundle on all the fees that result from this shameless practice.
Section 407(a) is not worth the paper it's printed on because it is very hard for a consumer to undo the garnishment, as I recently learned. My cousin (a 67 year old woman with a disabled adult son, who has been through a horrible marriage and divorce, several minimum wage jobs since she had no work experience, a car breakdown, etc.) had her ATM refused.
Continue reading "Think Public Benefits are Exempt from Execution? Think Again." »
A couple bought a house at a foreclosure sale, but when they got inside they learned it was full of live animals, dead animals and animal poop. The buyers are scrambling to get out of the deal, but, at least from the news report, there are no obvious grounds for reversing the deal.
The story is pretty gross, but it highlights something that lots of people don't realize: A homeowner is entitled to stay in possession of the home until after the foreclosure sale. No one --not the bank or the potential buyers--have any right to enter the house to see if the room arrangement is pleasing, the plumbing is functional or there isn't poop several inches deep on the floor.
As the subprime market continues its downward trend, think about the poop.
From the Oak Forest (IL) Star--The village of Midlothian, Illinois apparently has a full-service police department. If you're a local merchant, the chief of police thinks it's OK if the police help you collect your bills.
The story begins like many we hear in our academic research of talking to people with financial problems. Angela Procter ran up a $460 bill to a brake-and-muffler shop. She made a partial payment of $200, and the shop released her van to her. A later $150 payment brought the balance down to $108. Procter was not working because of a broken ankle, was pregnant with a child on the way, and had just been evicted from her apartment. Her fiancé was a construction worker and unable to find work during the winter months. As Procter was quoted, she appreciated the forbearance of the muffler shop, but she had to prioritize putting food on the table and a roof over the head of her child. Like many people to whom we talk, Procter was attempting to deal with her debt to the muffler shop, paying what she could. What did she get as a reward?
Gender-specific marketing is a mainstay of the ad industry--just think about the Virginia Slims ad. Woman-oriented versions of male products ("vintage rose" Carharrt overalls, pink hammers, etc) or women-only services (gyms, golf schools, etc) are growing in popularity. I recently received an advertisement that used gender specificity to market debt relief. This company, www.debtrelief4women.com, proclaims itself the "woman's choice for debt relief options." Their homepage features a drawing of a slim, young woman wearing a sporty outfit and make-up. In her hand, is a wad of cash (although a stack of bills might be more realisitic). It seems the company does not itself provide financial consultations, but instead matches women with debt management, consolidation or settlement companies based on information women provide. It's pure marketing ploy; the substantive "help" that women get when using a service is not necessarily tailored to women.
Individuals cope with debt and financial distress in ways that reflect their gender. Fellow Credit Slips contributor Dr. Deborah Thorne examined some of these issues in her dissertation and has a forthcoming work on the topic. A recent Pew Center study showed that women bear responsibility for bill-paying in most households. These behavioral differences along gender lines aren't lost on creditors. A Wall Street Journal Article on debt buyers reported that collectors know that women are more likely to repay than men, incentivizing debt companies to focus their efforts on accounts on which women are the primary debtors. See Suein Hwang, Small Claims, Wall Street Journal (Oct. 25, 2004). Debt Relief 4 Women is just another reminder of Elizabeth Warren's observation that the facial neutrality of commercial law can distract us from the gendered realities of debt and household economics.
In the nearly year of Credit Slips' existence, posts on debt collection have provoked consistently strong responses and lots of interest. The Federal Trade Commission is all ears if any Credit Slips readers would like to share their perspectives on issues relating to collecting consumer debts. The deadline is June 6th, and comments may be submitted by mail or electronically. Here are the technical details. The public comments to date offer some scary stories about abusive debt collection practices and seem to be submitted by consumers with real-life experience with debt collection. Read them. The FTC clearly is interested in comments from lawyers on the front lines of debt collection, whether their clients are creditors or debtors. For our professor audience, note that FTC says that it also welcomes "original research, surveys, and academic papers regarding consumer debt collection issues" and these papers are due September 7, 2007.
The topics for comment that interest the FTC illustrate a range of trends in debt collection, and hint at the FTC's interest in redirecting its regulatory focus in certain areas. As I read the topics for comment, I repeatedly was struck by pessism about obtaining reliable information on these questions. The sad reality is that there simply is not a substantial body of serious academic research on debt collection. Most empirical research is about bankruptcy, in part because the court process facilitates data collection. Many of the inquiries would require corporate proprietary or industry association data to answer, such as "provide data illustrating trends in the number or percentage of accounts in collection with each of the following: (1) credit issuers; (2) collection agencies; (3) collection law firms; (4) debt buyers; and (5) other identifiable industry sub-groups." On the other hand, an optimist could read the topics for comment as a future research agenda, a list of possible news stories, a manisfesto for legislative action, depending on one's livelihood.
For reasons not entirely clear to me, I am receiving advertisements for seminars on debt collecting. An example's here. Leaving aside my need to "protect creditor assets" from the rapacious pitfalls of the FDCPA and other such scourges, I am particularly intrigued by the branding message to "steer clear of predatory debtors' attorneys". This is surely a co-option of "predatory lending," which has (finally) worked its way into the policymaking lexicon. Frank Luntz (sorry, Dr. Frank Luntz) would be so proud!
During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.
I wanted to draw Credit Slips readers' attention to a wonderful (front-page) feature a couple weekends ago (Sat. Apr. 28) by Ellen E. Schultz in the Wall Street Journal ($) regarding the above captioned. Yes, it's another depressing but highly humanized account of elderly debtors having their bank accounts drained by savvy creditors with garnishment writs. But there's an interesting twist regarding the garnishment of putatively exempt Social Security funds. The funds, while exempt of course, lose their exemption once deposited into a bank account, unless the account owner (here, the elderly debtor, presumably having independent knowledge of this arcane legal requirement) affirmatively files an exemption notice. Does the Social Security Administration help out by reminding of this legal hurdle, perhaps under its FAQ? Nope. How about the banks, out of a sense of customer service? In hand washing that would make even Pilate proud, most of them (with some commendable exceptions) say that's not their place to get involved in the private treatment of customers, etc., etc. It's an eye-opening account about the chasm between legal formalism and statutory text ('exempt" social security in Congress' intent) and the less savory, and less inspiring, world on the ground....
This semester, I am teaching a required first-year course that teaches principles of statutory interpretation within a specific topic, and for my topic I am teaching the consumer credit statutes. As I have posted about previously, I structured my course as a mini-legislature. Students elected a speaker and adopted their own set of procedures to vote on amendments to the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), or the Illinois Payday Loan Reform Act (ILPRA).
Recently, we had our committee hearings, which consisted of students presenting their proposed legislation to the class. I just sat in the back row and listened. This is depressing for several reasons. First, the more I stay out of their way, the more they apparently learn. I watched presentation after presentation where students had studied each of these statutes, researched the academic literature and public-interest reports about problems with the statutes, and proposed changes to the statutes to make them work better. The other thing one learns sitting in the back row is that are more students than you would hope reading e-mail or surfing the Net instead of listening to their colleagues' presentations (note well if you are one of my students!).
I have been very impressed by the proposals that my students have made, and I thought I would share a few of them here. To catalog all of them would take too many pages, and this post will be long enough as it is.
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