Welcome to Lois Lupica

This week Credit Slips will feature posts from  Professor Lois Lupica. She is the Maine Law Foundation Professor of Law at the University of Maine Law School and counsel at Thompson & Knight LLP. Lupica's published works include writings about both business and consumer credit issues, including an early and important work on asset securitization and a piece on the effects of revised Article 9. My own personal favorite is the empirical study she authored with Jay Zagorsky on how debtors fare after bankruptcy. The study is sobering, suggesting that debtors may lag for a decade or more after filing behind similarly situated people who avoided bankruptcy. 

Professor Lupica is currently working on a large scale study of attorneys' fees in consumer bankruptcy cases. Funded by a grant from the ABI Endowment Fund, the study has already resulted in one piece, The Costs of BAPCPA: Report of the Pilot Study of Consumer Bankruptcy Case. I hope she will share more of her findings with Credit Slips. The increase in attorneys fees remains on the most enduring changes wrought by BAPCPA on the bankruptcy system. 

Welcome, Lois Lupica! 

Credit Cards Make You Fat

I know, I know, I am willing to say anything in my blog title to get you to read my post (see here for an oldie but a goodie). In my recently read pile is How Credit Card Payments Increase Unhealthy Food Purchases: Visceral Regulation of Vices by Manoj Thomas, Kalpeseh Kaushik Desai, and Satheeshkumar Seenivasan, which points to an association between what types of foods consumers purchase and how they pay at check-out.  The authors' basic hypothesis is that paying in cash is painful, or at least more salient, than credit or debit cards, which they characterize as "less vivid and emotionally more inert modes of payment." They do several studies but the first one uses data from actual shopping behaviors of 1,000 households over six months. The authors find  that these households buy a higher proportion of food rated as impulsive or unhealthy when they use credit or debit cards to pay for the purchases. They stress that the mode of payment did not affect the number of virtue products (such as vegetables) purchased. Another nugget of knowledge about consumer behavior; will we start seeing weight loss programs advise members to carry cash?

Can HAMP Help in Bankruptcy?

About six months ago, the government rolled out guidelines for how HAMP should work for people in bankruptcy. Given bankruptcy's historical role as a foreclosure prevention device, it never made sense to me why from its inception, HAMP did not envision ways for homeowners in existing chapter 13 cases to seek loan modifications and for people to try to obtain a loan modification as part of their chapter 13 bankruptcy. This may have just resulted from the right people not being in touch in a timely fashion. But now that HAMP is available for people in bankruptcy, does it really provide much?

Hats off to Ethan Cohen-Cole

Credit Slips was fortunate to enjoy posts last week by Ethan Cohen-Cole. It's always fun to have non-law profs bring their perspectives to this blog, and Ethan offered up interesting thoughts on a range of issues, from the immediate (perhaps imminent)  mortgage foreclosure compensation fund, to the big picture future of whether the Consumer Financial Protection Bureau can avoid regulatory capture. Thanks for your time and your ideas, Ethan.

Cash Is (Still? Again?) King

Payments innovations aside, Scott Schuh gave a preview of the soon-to-be-released results of the 2009 Survey of Consumer Payment Choice. The 2008 data are already available and provide a detailed portrait of payment practices of consumers (this is an excellent new study for researchers and reporters to use.) He reported as a preliminary finding that cash use had gone up notably from 2008 to 2009. After some discussion about who uses cash (hint: very few people who attend a payments conference!), one of the large banks pointed out that two of the fastest-growing population groups in terms of size and spending in America are Hispanics and Gen-Yers. Both groups have a predilection for cash. This suggests that the pull back toward cash may be a somewhat enduring trend because it could at least partly reflect demographic changes in the population of consumers. Scott Schuh also pointed out that there had been a huge increase in the availability of cash when stores began to offer cash back, essentially putting an ATM in every point-of-sale terminal.

And, of course, the recession looms large as an explanation for people returning to cash. Whether its because their credit cards have been cancelled, or people are afraid to borrow, or people think they can control their spending and save more with cash isn't clear. But Walmart Financial Services offered some insight on just how much hurt  American families are feeling. In the last year, Walmart stores have seen a huge (sometimes triple digit percentage increase) uptick in sales starting right at midnight on the 1st of the month and continuing all that day. Why? Because people are literally waiting at Walmart for their benefits or paycheck to become available, out of food and household basics for their family.

Welcome to Ethan Cohen-Cole

Credit Slips welcomes Ethan Cohen-Cole. He is an Assistant Professor at the Robert H. Smith College of Business at the University of Maryland--College Park. Previously, he was a research economist at the Federal Reserve Bank of Boston. He has done very interesting research on consumer credit, including work on access to credit after bankruptcy and redlining in credit card markets. You can review and download his research papers here. Prof. Cohen-Cole also studies banking regulation. We look forward to his posts, and your comments on them. 

Payment Possibilities

If "What's in Our Wallets?"  left you bored, this is the counter post. Last week I attended an event called Innovations in Payments organized by David Evans, an expert on credit cards. My take-away: if I want to be at the cutting edge of payments technology (and be able to teach my students the law they'll need to deal with popular payments 20 years from now), I need to step it up and start acquiring new payments tools. Exactly which one to get though, in the face of so many businesses wanting my consumer dollars?

What's in Our Wallets?

Capital One made the slogan famous, but it's more fun when it's not just a hypothetical question. Many of the Credit Slipsters research at least some kinds of payments, such as credit cards, and some of us teach payment systems courses in law schools. If, and perhaps it is a big if, you think that means we know something about payment systems, I thought it might be revealing to see how we do or do not translate our knowledge to our own behavior as consumers. So I polled the Credit Slipsters, and a few other people who teach payments law (some of whose responses will appear in comments to this post), and here is what they said about what they carry and how they pay.

I'll go first: I have an LL Bean Visa credit card. I like it because it is offered by Barclays rather than a TARP rescued gigantic card issuer, and perhaps not unrelatedly, because it has very low fees, such as a $15 late fee. I usually pay in full but sometimes I procrastinate (anybody who reads this blog will know this about me already). I also find the free shipping/returns/monogramming is a reward that I actually use, whereas with airline miles they just accumulated and whenever I wanted to use them all the seats were gone. I also have a Visa branded debit card issued by a local bank in Iowa. If possible, I always enter my PIN with this to save the merchant some money (interchange fees for PIN-based debit are cheaper than signature (Visa/MC) debit). If I had to guess, I would say that I use debit and credit each about half the time, but probably use the credit card primarily for travel, which tends to be large ticket items, such as hotel and airline tickets. I also make regular use of one stored value/prepaid/gift card, which is at Starbucks. It has a budgeting effect--when it's out at the end of the month, I at least pause before reloading the card. If you think I'm not exactly the most rational actor in the world, keep reading! 

MERS: Symptom or Cause

MERS, which stands for Mortgage Electronic Registration System, is under fire. Courts in a few states have held that MERS does not have standing to pursue a foreclosure in its own name, and there is a pending multi-district litigation claim against MERS. The most recent MERS news is the press release by the Attorney General for the District of Columbia. The District of Columbia has a non-judicial foreclosure process that begins with a Notice of Foreclosure form. The AG has announced that people facing foreclosure can assume that the completion of such a Notice, with its identification of the "Holder of the Note" and the "Security Instrument recorded" in the DC land records means that every intermediate transfer of the security interest is documented in the public records. Under the AG's interpretation, MERS does not meet this requirement. MERS, when it works properly, is privately tracking the transfer of mortgages without notation in the public records.

What Is the Government Interest in Bankruptcy Cases?

On Monday, the Supreme Court will hear arguments in Ransom v. MBNA, an appeal of a decision in a consumer bankruptcy case. The Bankruptcy Code requires chapter 13 debtors to commit all their "projected disposable income" to repaying their creditors. After 2005, for debtors whose income exceeds the median in their state, disposable income is determined by deducting certain expenses. In the Ransom case, the issue is whether a "debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards [of the IRS]” includes the cost of ownership for a vehicle that is not encumbered by a loan or lease.The statutory language is unclear, to put it mildly, and there are plausible readings of the statute that support either permitting or denying the expense.  So why is the U.S. government throwing its weight behind MBNA Bank and arguing that debtors should not be permitted to take the ownership deduction for vehicles that a debtor owns outright? What exactly is the government's interest in this case? Why are our taxpayer dollars at work here in briefing and arguing a dispute in which the adversarial aspect of bankruptcy (debtor and creditor litigating) seems to be fully functional?

Consumer Law

Credit Slips is a self-proclaimed blog about "credit, finance, and bankruptcy." Much of our discussion here focuses on consumer credit, which also makes up a large amount of what gets taught in law school courses on "consumer law." Jeff Sovern at St. Johns did a survey on the subject. And to understate things, the economy has provided significant fodder for discussions on consumer credit, including credit cards and mortgage lending, in the last decade, and so consumer law courses may increasingly be expanding coverage of credit or being replaced by seminars on predatory lending, the democratization of credit, the mortgage foreclosure crisis, etc.

I remain committed to "consumer law" as a broad field. While consumer credit is part of that, I believe there is a pedagogical value to teaching students about a wide variety of consumer-business transactions in a single course, and I believe there is theoretical coherence in consumer law as a field. An article in the New York Times, Airline Fees Test Travelers' Limits, nicely illustrates my thinking. The pattern of fee hikes, hard-to-discern terms, and complex pricing that the article documents in the airline industry is a pretty close parallel to the credit card industry in the last decade. The problems are fundamental to businessess--sophisticated repeat players aided by technology and expertise--selling things to consumers--relatively unsophisticated one-off players without technology or expert advice. For me, the most interesting question is trying to identify consumer-business transactions that don't exhibit the problems of these disparities. Those markets hold important lessons for the regulation of consumer credit that seems likely to occur in the next few years.

State-sanctioned Federal Bankruptcy

If Credit Slips had a category for "Beyond the Comfort Zone," I'd put this blog post here. But I'm curious about the pending California legislation, Assembly Bill 155, that would restrict municipal (Chapter 9) bankruptcy filings. The bill would require municipalities to obtain approval from the state-run California Debt and Investment Advisory Commission before filing bankruptcy. The political story is easy; this is the fall-out of the bankruptcy of Vallejo, CA last year. Among other concerns, unions whose members had their pay or benefits reduced want to restrict access of local governments to chapter 9. Cash-strapped cities, facing a double-whammy of lower taxes and higher claims on social services, feel differently.

Now my bankruptcy teacher was pretty decent but I never learned that the Bankruptcy Code gives states the power to limit their municipalities' ability to file a chapter 9 case. But it's right there in 11 USC 109(c)(2). (Of course, this means that I also didn't know that municipalities must be "insolvent" to file chapter 9, a requirement that is notably absent for debtors in other chapters.) Apparently, states take a variety of approaches to this--some prohibiting chapter 9, some remaining silent leaving things unclear, and some conditioning chapter 9 on some thing, as California's proposed legislation would do. I'm  struck by the remarkably different approach in chapter 9 than in chapter 11, where the doors are really wide open to bankruptcy relief. Are the public harms that different? The bankruptcy of a company, including the rewriting of its union contracts and the devaluation/cancellation of its stock, can have similar harms on communities. I'd be very grateful to Credit Slips readers who will share their thoughts about these issues; I have a feeling the future will bring more chapter 9 filings.

Fringe Banking and Financial Distress: Argument and Critique

Today at The Conglomerate Blog, there is an online workshop of former Credit Slips guestblogger Jim Hawkins' paper, Regulating at the Fringe: Reexamining the Relationship between Fringe Banking and Financial Distress. Jim shared some of his thoughts on what he claims is the "dubious" relationship between fringe banking and financial distress in some of his Credit Slips posts.

I found Jim's paper to be provocative and I've posted a critique of his approach at The Comglomerate as one of their invited commenters. I think Jim's definition of financial distress as too many dollars of debt is unduly narrow and that it is only by using that definition can be claim to debunk the relationship between fringe banking and financial distress--primarily by arguing that because these are small dollar loans they can't really be much of a problem. I also think Jim tends to overstate the extent to which the Bureau of Consumer Financial Protection was justified by concern about financial distress. I think its primary focus is on correcting malfunctions in markets caused by misinformation or deception. Jim himself seems open to intervention in fringe banking on that basis, as he concludes his paper by exploring rationales other than financial distress might support regulation. Check out The Conglomerate blog to join the conversation about this topic and to see the thoughts of other invited commentators: David Zaring, Larry Garvin, and Todd Zwyicki.

Visualizing Financial Distress

The Admistrative Office of the US Courts (AO) has released updated data on bankruptcy filings. While the AO data as some problems, as Bob Lawless has pointed out, I am pleased that they seem to have improved the accessibility of the data. For example, there is now an interactive map by state that is sort of fun (well, fun in my world).

One nice thing is the statistics on net scheduled debt. Given the way that some people seize on the dollars of debt in bankruptcy as a marker of the system, I like how the AO has deducted nondischargeable debt from the total debt listed by the debtor. To do otherwise, gives a misleading picture of how much "help" people get from bankruptcy. But additional caution is still needed. For the chapter 13 filers, about 2 in 3 of these people will not get a discharge of any unsecured debts because they will not complete the repayment plan. Much more importantly, these figures are total debt, the bulk of which will be mortgage and auto debt, which debtors must pay if they want to keep their homes and cars.

All in all, a better use of your time might be the interactive maps at the NY Fed. These have been upgraded recently to show delinquencies on auto loans, bank cards, mortgages, and even student loans. Check them out here.

Hat tip to former Credit Slips guest blogger, John Rao, for bringing the AO data to my attention.

Chasing Card Companies

The New York Times Wall Street Journal did a nice story a few days ago on the compliance issues swirling around the Credit CARD Act. It details the kinds of new fees that consumers are seeing and explores the legality of these practices. The article provides some ideas of things that the Bureau of Consumer Financial Protection might explore in its early days. Several of these practices seem legal under the new law but perhaps would fare less well under an unfair, deceptive, or abusive practices analysis. If nothing else, the Bureau would presumably be a one-stop repository for collecting and tracking the changing practices of card companies, a task now that the federal government largely delegates to news reporters!

Political Cartoons. Elizabeth Warren edition.

My husband commented the other day that he didn't think Elizabeth Warren was a "political figure." His argument was not that she is not an elected offical or that she doesn't have partisan allegiances. No, instead, he was focused on the fact that she has never been in a cartoon. But look what Google just turned up!  (By the way, I'm putting this under "Celebrity Bankruptcy," another blog category that puzzles me slightly.)

Financial Risks Follow to the Grave

The New York Times broke the story yesterday about how the VA may be mishandling the death-benefit accounts for life insurance beneficiaries of military personnel. Apparently many of the VA life insurance companies, including Met Life and Prudential, do not give beneficiaries a check when the policy is payable as a lump sum. Instead, grieving family are mailed a checkbook and told that the payout was ready for use in an "convenient interest-bearing account." But here are the catches: 1) The money is not in an FDIC-0insured account, meaning these beneficiaries' money could disappear if the insurers went under. This fact would be hard for consumers to discern given that the checks themselves bear the names of large banks like JPMorgan Chase. The money actually resides in the insurers' general corporate account, earning investment income. 2) The VA was under the impression that the insurers were patriotic volunteers, earning no profit on the checkbook option. In fact, the insurers earned about a 5 percent return, while the beneficiaries received 1 percent interest. When the NY Times explained this, the VA spokesperson said "Maybe I didn't ask enough questions." My former colleague at UNLV's William S. Boyd School of Law, Jeff Stempel, put a finer point on it. "[T]his is a scheme to defraud by inducing the policyholder's beneficiary to let the life insurance company retain assets they are not entitled to. It's turning death claims into a profit center."

Secrets about Elizabeth Warren Revealed

I have known Elizabeth Warren for ten years, and I know her pretty well. I've been to her home; she's been to mine. She sent me baby gifts; I got her a 60th birthday present. We exchange Christmas cards,  . . . you get the idea.

Now she's a candidate for this big-time appointment as the Director of the New Consumer Financial Protection Bureau. And somehow there are these things about her that must be deep-dark secrets  because it seems like people do not know Elizabeth Warren at all. (As Bob Lawless has written, I think the debate is becoming about a caricature of Prof. Warren, not Prof. Warren the real person.) So here it is . . . Secrets about Elizabeth Warren Revealed.

Credit Crunch

For virtually every hobby, interest or passion, there are bumper stickers, posters, Christmas tree ornaments, and desk knick-knacks. I like golf; I like to knit; I like basset hounds, and I have a haphazard and modest-sized collection of stuff that represent those hobbies. But for those of us who give the term "credit junkie" a different spin, it's pretty slim pickings. What am I supposed to do, collect discarded credit cards?

So I was delighted to find the "Credit Crunch" t-shirt, advertising "Crispy Sugar Coated Nuggets of Nothingness." It's sized just right for my sons, one of whom models it below. I dutifully explained to my children that this shirt is about what Mommy teaches. They nodded politely. Later my 4-year old told the grocery store clerk that his mom is a Professor of Cereal!

p.s. I have categorized this post under "Fine Arts and Credit & Bankruptcy" because I have no idea why we have that category as a blog!    

Overcoming Overconfidence in Bankruptcy

Elizabeth Loftus (UC-Irvine Law) has co-authored a new paper on lawyers' abiliy to predict outcomes in litigation. She and her colleagues surveyed about 500 lawyers with pending litigation, asking them to specify a minimum goal for their case and providing a confidence estimate for the chances of meeting that goal. The key finding: "Overall, lawyers were overconfident in their predictions."  The researchers find that lawyers don't get better at estimating outcomes with more years of experience; recent grads and old hands are equally likely to overestimate their odds of success. The article lays out all the ways that this can be harmful to clients, and to our legal system in general.

I've been thinking about this optimism bias in the context of bankruptcy law (and in the context of legal education). To what extent do bankruptcy lawyers exhibit this phenomenon? We know, for example, that only one in three chapter 13 bankruptcy cases gets to plan completion, and that many chapter 11 cases, particularly those of small businesses, are really liquidations and not reorganizations. And we know that what gets promised in a plan is often not what gets paid Do lawyers reflect these realities to their incoming consumer and business clients who are in financial trouble, or to their creditor clients? Perhaps bankruptcy lawyers, used to dealing with clients who have tried to be positive-think their way out of negative cash flows or buried their heads in the sand while financial problems mounted, are better at straight-talking to clients about their prospects of financial recovery.

$108 Million Settlement on Countrywide's Servicing Practices

Last week, the FTC announced a $108 million settlement with Countrywide based on allegations that Countrywide's loan servicing operations collected excessive fees. The complaint describes Countrywide's servicing practices for default fees as part of its strategy to keep on profiting from consumers, even in hard economic times. I've previously commented on Countrywide's description of this as a "countercyclical diversification strategy" that it trumpeted to investors, and what Senator Schumer thought of such a strategy. The complaint alleges that Countrywide used subsidiaries to mark-up fees--often by 50-100%--on default services such as property inspections. Instead of Countrywide loan servicing working directly with vendors for these default services, Countrywide loan servicing would contract with its subsidiary, who would then work with the vendor. And that extra step--from one Countrywide entity to another--dramatically boosted the fees that got charged to struggling homeowners. To me, the lesson of the FTC's enforcement action is that businesses can use subsidiaries but they can't use subsidiaries to upcharge consumers and obscure the real costs of services.

The settlement also addresses the problems with Countrywide's mortgage servicing in bankruptcy. The FTC alleged many of the same wrongs that I identified in a law review article on mortgage servicing in 2008, including that filing claims that it could not substantiate. The UST Program cooperated with the FTC on the enforcement activity, and the settlement also resolves the UST litigation against Countrywide.

If you are a consumer who filed a chapter 13 bankruptcy case with a mortgage serviced by Countrywide, you may be eligible for a cash award. The FTC website has more details.

Supreme Court Rules in Lanning

The Supreme Court has just issued its opinion in Hamilton v. Lanning, a case interpreting the "means test" that the 2005 bankruptcy amendments added to chapter 13. The issue was chapter 13's requirement that the debtor commit his or her "projected disposable income" to a plan, and whether projected disposable income should be determined in a mechanical way (based on the debtor's income for the past six months as defined in the means test) or whether projected disposable income should include reliance on some estimate of the debtor's income in the future during the plan period. The Supreme Court rejected the mechanical approach, which was argued for by the debtor trustee and the National Association of Consumer Bankruptcy Attorneys, and adopted the forward-looking approach. The decision, authored by Justice Alito, was 8-1, with a dissent by Justice Scalia arguing the plain meaning of the text supported the mechanical approach.

I'm certain there will be loads of technical commentary forthcoming on this case, debating whether the Supreme Court's interpretation of the statute was correct. I have some non-technical observations.

First, it isn't clear that debtors are "hurt" or "helped" by this decision in terms of what they will be required to pay. Some debtors will have incomes that have picked up right on the eve of filing, so their forward-looking income is higher. But other debtors will have earned more in the past six months, filing in an income trough with bleak prospects. We could empirically test which system is better, but of course, to the best of my knowledge, nobody did this. (Query whether such data would have been persuasive to the Court if it had existed).

Second, I am quite sure this decision hurts debtors. How can I reconcile that with my first observation? Because it's not just the law that matters. In many contexts, including this one, the cost of the law will determine the justice received. The mechanical approach is easier to apply and is less likely to spawn litigation, which consumers filing bankruptcy can ill afford. Faced with a choice of filing a plan that is likely to begin a lawsuit, some consumers will just give up and drop out of chapter 13 or not bother to file at all. By holding that "only in 'unusual' cases, a court may go further and take into account other 'known or virtually certain information' about the debtor's future income or expenses," the Court will add a layer of complexity to lawyers' and debtors' decisionmaking in chapter 13. And legal decisions don't come free.

A Primer on the Consumer Financial Protection Agency

 With a financial reform billpassed in both the Senate and the House, it seems that a Consumer Financial Protection Agency is going to become a reality. It's interesting to look back at the original development of the idea and then see where we are now--and of course opening up comments for speculation on what the final agency will, and should, look like. If nothing else, the evolution of the names for the agency have been interesting--and remain unsettled! (It's a "Bureau" in the Senate bill, and an "Agency" in the House bill). For simplicity here, I call it the CFPA.

In 2007, Elizabeth Warren wrote a piece in the journal, Democracy, called Unsafe at Any Rate. At 9 pages long, it's well worth reading. It's a good reminder of the core principles underlying the need for such an agency and it underscores how a metaphor, exploding toasters are like credit cards, can help an academic idea take hold in the policy world. Prof. Warren later co-authored a full-length law review article with Prof. Oren Bar-Gill called Making Credit Safer, which among other things describes in more detail some of the behavioral economics research that supports the need for such an agency.

Now, in 2010, three years later, a consumer financial protection agency is part of both the House and Senateversions of the financial reform bill. Prof. Jeff Sovern, an expert in consumer law, has prepared a very helpful Powerpoint slideshow that highlights key differences in the bills. Here are some of the key differences:

Protecting Public Benefits from Garnishment

 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.

How to Find the Owner of Your Mortgage

Concerns continue about parties filing foreclosures when they do not own the note. Florida recently enacted a rules requiring plaintiffs in foreclosure to verify ownership of the note. (Here's a brief article on the rules, with the original subheading "Bankers Don't Like It"). While these concerns may be interesting for those of us who understand civil procedure, standing, and the importance of the rule of law, the practical problem looms for homeowners who want to know who owns their note. Particularly, in non-judicial foreclosure states or for those families who are not in foreclosure, they do not have the option to ask the judge to order the plaintiff (foreclosing lender) to prove ownership.

John Rao, an attorney at the National Consumer Law Center and Credit Slips guest blogger, wrote a great short piece in the National Association of Bankruptcy Trustees publication this winter called "Six Ways to Find Out Who Owns and Services the Mortgage." I can't seem to find an online version, so I'll give the short story here. For ownership (rather than servicing), the best options that John identifies are:

Wanted: People with Good Credit for Low-Paying Jobs

Despite the increased proportion of Americans who are behind on their mortgages or have lost their houses to foreclosure, the practice of doing credit checks on prospective employees continues to climb sharply in popularity. The Society of Human Resources Management’s recent survey found that 60 percent of employers run credit checks on at least some job applicants; back in that “healthy” economy of 2006, the comparable figure was 42 percent. The growth in credit checks by employers is some evidence to counter arguments that the stigma of financial distress, bankruptcy, or foreclosure is falling as more and more Americans struggle to meet their debt obligations. Employers seem to be taking the opposite tact, with the weak labor market permitting them to be increasingly selective about whom to hire. Credit checks are a fast and cheap way to screen out candidates. And one in 8 employers checks the credit of every applicant for every job--meaning that people like janitors and retail workers can suffer employment discrimination on the basis of their credit.

Repo Madness

A few months ago on Credit Slips Bob Lawless described a situation in which a car repo agent in California took a car with a toddler inside. Bob thought it wasn't breach of the peace, but I think Bob was wrong and he should stick to prognosticating about the bankruptcy filing rate, where he's been dead on. The National Consumer Law Center has issued a new report, Repo Madness, that describes many more harrowing incidents in repossession. The report describes how two repo agents and four auto owners have been killed in the past three years during repossessions, and includes a map showing geographically how many and where particularly troubling incidents have occurred. The report makes an interesting analogy to laws that limited landlords' rights to evict tenants, suggesting that mandating a summary process for repossession (such as replevin) may be a social and economic good. The report is a reminder of the dark side of self-help repossession, which students (and maybe their teachers) tend to find the most fun and entertaining day of Article 9 Secured Transactions classes.  

Warren op-ed: Banking on Hypocrisy

Check out Credit Slips co-blogger Elizabeth Warren's op-ed on Politico, entitled Banking on Hypocrisy. She quotes extensively from a letter that the American Bankers Association sent to banking regulators in 2006 in opposition to the proposed intra-agency guidance that would have required better underwriting of nontraditional and subprime loans. While it's entertaining--and painful--to read just how wrong the ABA was in its assessment of mortgage risk, Professor Warren's point is to compare the ABA's position on consumer protection regulation in 2006 with its current stance. In the memo, the ABA decried the "marriage of inconvenience between supervision and consumer protection," saying that it blurred "long-established jurisdictional lines." The ABA recommended that the safety and soundness provisions be separated from consumer protection provisions. Yet, now the ABA has opposed a stand-alone Consumer Financial Protection Agency, saying that safety and soundness and consumer protection need to be performed by the same agency. The ABA reminds me of Mayor Quimby from the Simpsons: "Very well, if that is the way the winds are blowing, let no one say I don't also blow."  (Thanks to Bob Lawless for offering up this quote the other day in another context; it's so apt these days!)

Redemption (of the 722 variety) for Struggling Homeowners

Homeowners continue to struggle, foreclosures continue to climb, and loan modification efforts continue to lag. A persistent problem, pointedly described in these letters (July 10, 2009 and March 4, 2010) from Rep. Barney Frank to the large banks, is that the banks that hold second mortgages are not modifying those loans. (Yep, these are the same banks that took TARP money). The reluctance of the second lienholders to agree to a modification gums up the process for trying to get a modification on first, and usually much larger, mortgages. The investors in the first loan somewhat sensibly resist modifications, particularly those with principal write-downs, pointing out that it doesn't seem right that they should take a haircut, while junior lienholders refuse to modify their loans. And while the Administration announced new initiatives with HAMP and FHA to help with the second lien problem, I remain skeptical. After all back in April 2009--a year ago, they also made an announcement that they were revising their loan modification programs to deal with second liens. Hhmm . . . Deja vu? Why wait another year while servicers build a platform and train personnel, and Treasury writes regulations, etc.

Here's a legislative solution to the second lienholder hold-out problem. Congress should amend section 722 to permit chapter 7 bankruptcy filers to be able to redeem any junior loan on a debtor's principal residence. Current bankruptcy law permits debtors in chapter 7 bankruptcy to redeem personal property, such as cars, by paying the lienholder the value of the collateral. This redemption right exists regardless of the terms of the loan contract. The effect of the redemption is to remove the lien from the collateral. To redeem, a debtor must pay the secured party the amount of the allowed secured claim that is secured by such lien in full at the time of the redemption. If a secured party is completely underwater because the value of the first mortgage exceeds the house's value, the debtor would file a motion to redeem under 722 and pay nothing (that's the amount of the allowed secured claim!))  I think this legislation would provide some real leverage to get banks to agree to write down second loans.

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

While the media focuses on the total number of filings, a drill down into those data can also tell us something about the pain that families are suffering. In the last two years, since the foreclosure crisis, the fraction of all consumer filings that are chapter 13 cases has plummeted. In the language of taste tests of soda pop, today's consumers prefer chapter 7 three-to-one over the competition (aka chapter 13). Check out these data from the UST Program. In 06-07, chapter 13s averaged about 38% of all filings. In 08, there was a steep drop to 31%; and in 09, a further drop to 26.5%. These are really big changes in such a large system.

 

The obvious explanation for this fall in chapter 13 is a decline in people trying to save their homes, which we think is a major reason that people chose chapter 13 instead of chapter 7. 

Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the "crisis" is  a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration's projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say "misleading"?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can't make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted. And all this, despite BAPCPA's purported intent of driving up chapter 13 filings and making people pay more of their debts.

Homeowners' pessism may not be a bad thing. In a research paper that I authored with John Eggum and Tara Twomey, we found that chapter 13 filers in April 2006 (before the foreclosure crisis) had very high homeownership costs, with more than 70% of homeowners trying to save homes that subsumed more than 30% of their incomes (the long-standing standard for affordable housing). The lower fraction of chapter 13 filings may ultimately translate to a higher rate of plan completion for chapter 13; if consumers are reticient to try to save homes with high costs, maybe more than 1 in 3 chapter 13 plans will make it to completion and a higher fraction of chapter 13 debtors will earn a discharge. Time--a long time, given the five year repayment plans that dominate chapter 13--will tell if the lower proportion of chapter 13 cases as a share of total bankruptcies will correlate with a higher discharge rate for chapter 13.

The Ban on "Universal Default"

 Did Congress' effort to protect you from your card company with the Credit CARD Act inspire you to pore over the new Cardmember "Agreement" that probably arrived in your mailbox this week? I actually read at least part of mine, looking in particular at the implementation of the Credit CARD Act. (I am apparently one of the "consumer advocates" that Ronald Mann thinks has the time to "scrutinize the agreements and bring attention to provisions sufficiently onerous that they would not bear public scrutiny.") 

The first place I looked in the Cardmember Agreement was the paragraph labeled "Default/Collection."  I was looking for the much-touted restrictions on universal default. Here is what I read, to my initial surprise: "Your account may be in default if any of the following applies:  . . . we obtain information that causes us to believe that you may be unwilling or unable to pay your debts to us or to others on time."  Wait a minute. . .  That sounds like my default (or purported default) on my debts to someone else is a default to JPMorgan Chase. Isn't that what "universal default" is?

Actually, no, at least not as defined in the legislation. The Credit CARD Act prohibits raising "any annual percentage rate, fee, or finance charge applicable to any outstanding balance" with a few exceptions.  Notably absent from the list of exceptions is the ability to increase those charges based on a cardholder's default to other creditors. But of course that is not what the JPMorgan Chase agreement permits. Rather, it says that I can be in "default" for being unwilling or unable to pay debts due to others, not that my charges can be increased. Under the Cardholder Agreement, a default permits JPMorgan Chase to close my account without notice and require me to pay my unpaid balance immediately. That is pretty grim result for a late payment to another creditor, even if it is not "universal default."

Conference on Subprime Lending

An upcoming conference on subprime lending will feature empirical work from a data set of subprime loans put together by a collaboration of consumer advocates and professors. A brief conference announcement and link to the conference website is below. Ian Ayres is the luncheon speaker, and many of the paper titles are intriguing, including my favorite "How Good is the GFE? How Much Truth is There in TILA?"  I particularly note that the conference is open to practitioners, as well as academics, that CLE credit is available, and that the registration cost is very reasonable.

Conference Announcement: The National Consumer Law Center, University of Connecticut School of Law and Valparaiso University School of Law, with the generous support of the Ford Foundation, are pleased to announce a symposium entitled: Anatomy of the Subprime Mortgage Crisis. An interdisciplinary group of scholars will present original empirical papers exploring the terms and characteristics of subprime mortgages, based on a unique database offering unprecedented loan-level details of mortgage terms and borrower characteristics compiled from actual loan files. Speakers will include economists, geographers, sociologists and legal scholars, speaking on such topics as the effectiveness of disclosures, equity stripping and the use of subprime loan proceeds, and racial disparities in subprime pricing and loan terms. The symposium will be held at Valparaiso Law School in Valparaiso, Indiana on March 26, 2010.

A schedule and registration information is here.

Produce the (Bogus?) Paper

 In 2007, I wrote an article showing that notes and mortgages were often missing from bankruptcy mortgage claims, despite a clear rule that they should be attached. That finding did not establish that companies do not have such documentation. At that time (a long-ago era of blind faith in commercial entities), some people suggested to me perhaps creditors simply do not wish to be bothered with the time and expense to comply but that all transfers were valid. In the intervening years, story after story has emerged about mortgage servicers who brought foreclosure cases without being able to show their clients had a right to foreclose. Homeowners, desperate to stave off foreclosure while negotiating for a loan modification or waiting for HAMP to become operational, are increasingly demanding that lenders "produce the paper." In legal terms, this means the servicer should show that it is the authorized agent of a trust or other entity that is the holder of the note and the assignee of the mortgage.

Upon challenge, many companies have been unable to show they had the paperwork, leading to their cases being dismissed (see here, here and here for some examples). The hard part has been to figure out the longer term consequences of lacking a proper chain of negotiation and assignment. What is the effect of an assignment of a mortgage in "blank"? Is this an incomplete real estate instrument that has no valid effect, similar to a deed without a grantee? Can parties go back after the fact and create assignments today to correct problems in transfers from years ago (and if so, what about when the chain of title involves a now defunct lender or bank? what about corrections to chains of title made after the debtor files bankruptcy and the automatic stay is in place?)

Lenders and their agents seem to busy churning out assignments to repair defects and create a paper trail. Of course, with all this paperwork creation, there are bound to be some slips-ups. Follow this link and click on "view image" to see the public recordation of an assignment "for good and valuable consideration" of a mortgage to "Bogus Assignee for Intervening Asmts, whose address is XXXXXX." If this works to assign a mortgage, what is the purpose of requiring assignments at all?

Welcome to Guest Blogger Jim Hawkins

Credit Slips is pleased to welcome Jim Hawkins as our guest blogger for the upcoming two weeks. Jim is an Assistant Professor at the University of Houston Law Center, where he teaches contracts and consumer protection. His recent scholarship focuses on fringe banking, including payday loans and rent-to-own transactions, and on health care finance. He has two forthcoming papers on financing arrangements in the fertility market. Much of Jim's research draws on interviews with industry professionals, offering their insider view on the structure and nature of credit transactions. We look forward to his posts!

Modification Scams

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

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

Subprime, Exotic or "Crap?" Mortgage Industry Lingo

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

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

Spookiest Bankruptcy Opinion of 2009

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

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

Means Test Changes Won't Mean Much

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

Lying Is Wrong

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

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

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

Risks of Reverse Mortgages

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

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

Tenant Protections in Foreclosure

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

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

Title VII of the Helping Families Save Their Homes Act provides uniform federal protection to tenants after foreclosure--at least until the law expires on Dec. 30, 2012 (apparently the date by which someone thought the foreclosure "crisis" will have abated). The law requires the new owner of a foreclosed property to allow tenants to stay in the foreclosed property for the remainder of the lease. If there is no lease, or if the lease is terminable at will under state law, tenants must be given at least 90 days' notice before they may be evicted. This is a floor that does not preempt more generous state law. 

I'm interested in how financial institutions and tenants are going to deal with these requirements. Lenders have attorneys who routinely handle evictions after foreclosure. Being a landlord is a different task. Are tenants supposed to call the former owners' mortgage servicer when their pipes burst? If not, how is the tenant supposed to learn exactly who is the new owner of the property? Are note holders actively hiring property management companies to comply with this rule? Perhaps more interestingly, the bill doesn't seem to permit an eviction during the 90 days even if the tenants declare they aren't going to pay a dime of rent!

The Office of the Comptroller of the Currency has hardly offered answers to national banks. After waiting three months after the law's effective date, it put out a one-page release advising banks to "adopt policies and procedures to ensure compliance." Gee, that's helpful. I'm betting the readers of Credit Slips will have some more concrete thoughts about this.

Overspenders to Face Tax Audits?

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

The Benefits of Being Litigious

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

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

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

Complaining to HUD about Servicing: Thunder on Deaf Ears?

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

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

Thanks to Max

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

Greetings to Max Gardner

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

Fed Conference on Consumer Credit

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

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

Mortgage Servicing Update

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

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

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

Welcome to Prof. Kevin Leicht

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

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

Gamble Away the Risk

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