postings by Katie Porter

AALS Debtor-Creditor Call for Papers

posted by Katie Porter

The Association of American Law Schools' Debtor-Creditor Section issued a call for papers on debtor-creditor scholarship, most broadly understood, for presentation at the AALS Annual Meeting in New Orleans in January 2010. Proposals are welcome from a wide array of perspectives and strong preference will be given to proposals from those who will not yet have been awarded tenure by January 2010 and to those whose work is not already well known within the section. Proposals may be in any stage of production, from early-stage idea to mid-stage working draft to polished paper, though work that will not be published by January 2010 will be strongly preferred.  There is no publication commitment. Deadline for submission is Monday, August 31, 2009. Please email proposals to Jason Kilborn at

Download AALS_section_Call_for_Papers_2009

Does President Obama need to nominate 339 (or so) bankruptcy judges?

posted by Katie Porter

Tuan Samahon's new article, Are Bankruptcy Judges Unconstitutional?, 60 Hastings L. Journal 233 (2008), offers a fresh twist on the constitutionality of the bankruptcy judiciary. He sidesteps the Northern Pipeline v. Marathon debate about whether bankruptcy judges can or should be shielded by Article III tenure. Instead, he maps out an Article II challenge to the current appointment process for bankruptcy judges. Today, candidates apply for vacant bankruptcy judges positions, are reviewed by a merit selection panel and then are chosen by the U.S. Courts of Appeals. Prof. Samahon argues that modern bankruptcy judgeships have qualities such as safeguards against removal, expansive jurisdiction, and hefty duties that are incompatible, or at least colorably incompatible, with inferior officer status. While the "Excepting Clause" of the Appointments Clause in Article II permits "inferior officers" to be appointed by the courts, if bankruptcy judges are in fact "principal officers" of the United States, the Constitution would require the President to nominate and the Senate to confirm bankruptcy judges.

Prof. Samahon analyzes the tension between Morrison v. Olson and Edmond v. United States, suggesting that an appointments clause challenge to bankruptcy courts could come out either way. If Morrison is overruled, then existing bankruptcy judgs should be safe. However, if Morrison is good law and an appointment challenge succeeds, we would have 339 new positions to fill. And the fix used post-Marathon, vesting appointment in circuits courts won't work, leaving the Senate and its staffers with a big task and lots of bankruptcy professionals with new opportunities.

The article has an interesting twist for judicial egos. Surely most judges would like to retain their positions and not have to endure a Presidential appointment and Senate confirmation process. Yet, it's an odd world where judges clamor to establish their "inferiority," especially after years of the bankruptcy judiciary working to establish its reputation as a highly-qualified and effective judiciary.

Laughing through the Pain

posted by Katie Porter

This economic meltdown isn't fun for anyone, not even bankruptcy law professors. But Americans are creative, resilient folks and in the midst of hardship, some people are finding ways to cheer themselves with humor. Here are three recent examples to lighten your day:

A former student of mine wanted to teach his elementary school-age son about the financial system and give him a taste of entreprenuership. They created Bankster Buddies toilet paper, which is printed with the faces of government officials who had a role in the meltdown. The bipartisan paper bears a memorable slogan: They dump on us; we wipe with them!

Next up is the Disposable Bullshit Bag. The bag comes printed with directions and carries a handy warning:  "Do not attempt to dispose of your BS through any government agency since they produce more bullshit than they can dispose of themselves." I've located a picture here but don't know where to purchase them. They are the perfect gift for that hard-to-shop for family member though.

Max Gardner of Shelby NC sent me a new twist on a classic song. Take a load off Fannie illustrates the current meltdown with visual images, including some great headlines from 2008 like "Bernake says housing crisis is contained."

I'm sure Credit Slips readers will have other examples. I think I've already pushed the outer limits of taste with my first two examples, so keep it in bounds, but feel free to share. We all need a laugh to lighten our load these days.

A Second Life for Old Cards

posted by Katie Porter

Credit Slips has an internal policy of not posting about anything other than debt or credit. No movie reviews, no divulging secret recipes, no waning on about a fabulous vacation to Nebraska. But I am nothing if not resourceful in circumventing policies, especially when they are enforced by Credit Slips blog master Bob Lawless.

Like virtually everything else, credit cards have a lifespan. Some die a natural death at expiration, replaced by the next generation of shiny replacements. Others terminate prematurely, either through suicide when their owners get fed up with their issuer's tricks or traps or through murder when the card issuer prematurely cancels the card. Both of these practices may be more frequent in the current down economy as NPR and have reported. What to do with all these old cards?

Continue reading "A Second Life for Old Cards" »

Anticipating Refund Anticipation Loans

posted by Katie Porter

I've clearly become predictable in my posts, as someone recently wrote to me wondering where is my annual tax-time rant against refund anticipation loans (RALs). In fact, I have written about them twice before on Credit Slips, here and here. But I think this annual lending "opportunity" deserves another round of criticism; this is a bad product that just won't seem to die. The number of RALs held fairly steady between 2006 and 2007, around 9 million loans.

RALS are 1 to 2 week loans administered by tax preparers and banks working together. The loans are secured by the taxpayer's expected refund.  In their new report on RALS, the National Consumer Law Center and the Consumer Federation of America find that a typical RAL is about $3,000 and carries an APR of 77% to 140%. While the high APR for a RAL makes it similar to other short-term loans such as payday loans, there are some unique justifications for regulating or discouraging RALs that go beyond the high price paid by consumers.

Continue reading "Anticipating Refund Anticipation Loans" »

Thanks for Kathleen Keest

posted by Katie Porter

Credit Slips thanks Kathleen Keest, Senior Policy Counsel with the Center for Responsible Lending, for her contributions as guest-blogger last week. Kathleen highlighted some historic trends in consumer credit and gave her insights on some very pressing current matters, including the underwriting of loan modifications and the securitization of auto loans. We hope to have her join us again and will keep an eye out for her continued advocacy efforts on behalf of American families.

Mortgage Database

posted by Katie Porter

The National Mortgage Data Repository is making its data available to a select group of applicants to conduct mortgage resarch. The Repository is a joint project of the National Consumer Law Center and the University of Connecticut School of Lawand includes data from 750 loans made in 10-15 states between 1994 and 2007. While the database isn't as comprehensive as HMDA or Loan Performance, it has a unique collection of data and the data are free. For each loan, the researchers have gathered the loan application, the truth in lending disclosure, the good faith estimate, the HUD-1 Settlement Statement, and the loan note. These are the core documents in a mortgage origination, making this a great dataset to study the costs of mortgage credit and underwriting decisions.

Research proposals of 2 single-spaced pages are due by March 31, 2009. Submissions are welcome not only from academics but also from advocates, attorneys, and other professionals interested in mortgage issues. (Having teamed up with guest blogger Tara Twomey for our Mortgage Studyof bankruptcy and homeownership, I encourage my scholarly colleagues to consider the many virtues of collaborating on research with attorney/practitioners). Authors whose projects are selected will present their work at a symposium in Spring 2010 at Valparaiso University School of Law. The full call for papers is here: Download Investigating Lender Practices in the Subprime Mortgage Market . Thanks to former guest blogger Pat McCoy for sharing this opportunity with Credit Slips.

Welcome to Kathleen Keest

posted by Katie Porter

Credit Slips welcomes Kathleen Keest, an expert in consumer credit. Kathleen brings multiple perspectives to her opinions, having provided legal representation to low-income families as a legal aid attorney, exercised enforcement authority as an Assistant Attorney General in Iowa, and worked on policy issues for the National Consumer Law Center. Kathleen is currently Senior Policy Counsel at the Center for Responsible Lending, a Durham, North Carolina-based research group. The Center for Responsible Lending produces research and advocates for policy reform on nearly all the major consumer credit issues, including mortgage lending, payday lending, and credit cards. It is affiliated with the Center for Community Self-Help, a non-profit financial institution that has provided over $5 billion of financing to low-income households, small businesses, and non-profits.

Kathleen has received well-deserved recognition for her dedication to improving the consumer credit system. She has been honored with the NCLC's Vern Countryman Award, NACA's Advocate of the Year award, and ACCFSL's Senator William Proxmire Lifetime Achievement Award. My students know her from the 8th Circuit opinion, Besta v. Beneficial Loan Co., an important decision on unconscionability, in which the court relied on her expert testimony.

What's in a word (or 2?) Cramdown

posted by Katie Porter

Last Sunday's New York Times Magazine's feature, On Language, discussed the etymology and signification of the word "cramdown." (Or is it "cram down?" That's a separate debate that professors have with law review editors every year).

William Safire observes that cramdown is coming into popular parlance as bankruptcy becomes an everday topic and the debate continues about the mortgage modification legislation. Credit Slips guestblogger, the Honorable Eugene Wedoff, found a use of the term in a 1948 law review article and a 1944 judicial opinion. The term has a general use as a verb to indicate forcing unwanted treatment on creditors. In today's bankruptcy context, the term refers to at least two specific types of such treatment: 1) reducing a creditor's secured claim to the value of the collateral and 2) confirming a chapter 11 plan over the objection of a class of dissenting creditors. Law students often become confused when their professors use the terms in these two different contexts. I try to use cramdown only to mean the chapter 11 voting override provision and instead speak of "lien stripping" to refer to the writedown of a secured claim under section 506 of the Bankruptcy Code. (Of course, lien stripping is a misnomer, since the the lien remains on the collateral and should not be confused with lien avoidance. What is being "stripped" in part is the value of the claim.)

Safire suggests that the ugly connotations of the word cramdown may be hindering legislative efforts to pass mortgage modification. Senator Durbin's spokesman said that the appropriate term to describe his proposed legislation is "judicial modification." While not as colorful as cramdown, it has the virtue of reminding people that a write down in principal is NOT the only feature, and may not even be the most beneficial or widely used feature, of the legislation. Depending on property values where you live, when you bought your house, the type of loan, and future interest rates, debtors may find reductions in interest rate or reamortizations of their loans to be more helpful in reducing their monthly payments and avoiding foreclosure. Using cramdown as shorthand to describe the bill gives short shrift to its potential benefits when all the term may invoke for many people is the specific ability to reduce a mortgage to the value of a house.

Should I File Bankruptcy?

posted by Katie Porter

Several news stories have tackled this question about when a consumer should consider bankruptcy. In addition to the Newsweek piece that attracted lots of attention, today's New York Times Cost of Living column by M.P. Dunleavey is entitled "Bankruptcy as a Step to Solvency." The column tackles some of the concerns that people may weigh in deciding whether they need bankruptcy, and if so, whether now is the right time to file, including the effect of bankruptcy on credit, the ability to preserve assets, and other strategies such as dipping into retirement accounts to pay debts. Judge Bruce Markell recently came across a "rule of thumb" book that advised that people should consider bankruptcy if it would take more than five years to pay off your debts or you would have to use assets to do so. (Note: the Judge has no position/comment on the appropriateness/usefulness of such a rule). Many of our Credit Slips readers help clients answer this question about whether they need bankruptcy every day, and most of us have had to counsel friends or family about bankruptcy. What is your rule of thumb, if you have one? What is the "last straw" tactic that you think families should avoid and file bankruptcy instead?

Cramdown Controversy #2--Will I "Succeed?"

posted by Katie Porter

Our active readers at Credit Slips already started debating the second controversy about the pending cramdown legislation: is the failure rate of chapter 13 too high to make mortgage modification in bankruptcy a very useful tool? To briefly reprise that discussion and add my own gloss, there are longstanding lamentations that chapter 13 is a poor system because a minority of debtors completes the repayment plan and receives a discharge. The academic studies suggest the number is about 33%; I believe the National Association of Chapter Thirteen Trustees thinks it is about 40% (one wonders why the US Trustee Program doesn't carefully track this and publish it?)

So lots of chapter 13s fail. But what conclusion should we draw from that fact? This is a broad question and one that I'm exploring in a new empirical research project. I do not believe that chapter 13s "fail" just because they do not reach discharge. For now, let me narrow that concern to whether cramdown legislation is sound policy.  A  couple of observations:

  1. The failure rate for chapter 13 may be, at least to some unknown degree, a result of housing affordability problems. Tara Twomey, John Eggum, and I have a forthcoming paper showing that over 70% of chapter 13 homeowners in our 2006 sample spent more than 1/3 of their incomes on mortgage payments, the HUD benchmark for unaffordable housing. If cramdown lets debtors reduce their mortgage payments, it may permit more debtors to confirm plans and give debtors needed flexibility in adjusting their budgets to the normal ups and downs of life. Put another way, the low chapter 13 completion rate may be an effect of the inability under current law to modify mortgages, which is all the more reason to permit such modification.
  2.  Lots of people are going to have upheavals in their lives just because that is life. As one of our Credit Slips commentators said: "Chapter 13 cases fail primarily because '_____  happens' in the 3-5 year term of the plan. Debtors live and die; they change jobs; they lose jobs; they move; they buy and sell homes; they get married; they get divorced; they have kids; they lose kids; they get sick; etc. -- all of which impact their financial circumstances." These circumstances would occur and be problematic regardless of how we structured the mortgage relief--that is, they would hamper non-bk court modifications too.
  3. One benefit of modifying mortgages in bankruptcy is the potential to actually monitor what happens. IF the Administrative Office of the US Courts and the US Trustee Program release the needed data, scholars and advocates can track these cases. How many debtors are seeking modifications? What kinds of terms are courts granting? How are these debtors faring? Such data has been scarce of non-existent for the voluntary modification programs. What data do exist, such as those that Alan White examines, seem to me to indicate that a very high fraction of modifications are doomed to failure.

Cramdown Controversy #1--Who Do I Pay?

posted by Katie Porter

The pending legislation to permit courts to modify home mortgages is stirring up some controversies--even among its advocates. The key issues are operational and very important, I think, to the success of this legislation. Here's the first brewing controversy: How will consumers make the payments on these modified mortgages (directly to the mortgage servicers or through the chapter 13 trustee?) 

The pending legislation contains language that would require the payments on mortgages modified in bankruptcy to be made "directly to the holder of the claim." In more than 2/3 of jurisdictions, chapter 13 trustees serve as conduits for at least many mortgage claims, meaning that the debtor pays the trustee the mortgage payment, along with their payment on their unsecured claims, and the trustee transmits the payment to the mortgage company. The legislation, apparently at the urging of some consumer advocates, would bar this practice. I think this is a bad approach for several reasons: Why change existing practices that are working well and add confusion? Some courts have local rules that require debtors to pay all claims through the trustee; the legislation would override such rules, which are growing in popularity becuase of problems with letting debtors make mortgage payments. Many debtors like the convenience of making only one payment--to the trustee--and letting the trustee disburse. It helps keep them on track financially and may improve completion of chapter 13 plans. Further, given the numerous and well-documented problems with mortgage servicers' ability to correctly apply payments in chapter 13 cases, why put the burden of sorting all those problems out on the debtor or debtor's counsel? If the trustee is the conduit for the payment, then the trustee can take steps to ensure the payments are applied properly and the debtor is being charged correctly. I suspect this stems from some concern that consumers shouldn't have to bear the added costs of paying a trustee. Many trustees, however, take only 5% commission instead of the usual 10% for the disbursement on mortgages, and if Congress is concerned about this, they could amend section 586 to provide for a lower trustee fee for mortgages. Also, consumers who pay the trustee are getting services; the trustee is the one who must wait on hold with the mortgage servicer, try to reconcile the accounting, deal with RESPA and escrow issues, etc. I think it is fair to pay trustees for that work. I think debtors should have the option of making payments on a modified mortgage either directly to the mortgage company or through the trustee, as is currently the practice.

Cramdown Commentary

posted by Katie Porter

Bob scooped me on an initial post about the deal between Citigroup and Senate Democrats on pending legislation to permit bankruptcy judges to modify mortgages in bankruptcy. But I have details. And commentary. And questions.

First, the letters from Citibank to the House and Senate outlining the changes that they request be made to the legislation are available in the middle of this WSJ article. They requested three changes to S.66 or H.R. 200 (both denominated the Helping Families Save Their Homes in Bankruptcy Act of 2009). First, that the legislation be limited to loans in existence when the legislation is enacted. This gives the bill a sunset, of sorts, but it could be a long one, given some people have 30 or 40 years left on their loans. Second, only when a violation would give rise to a right of recission under the Truth in Lending Act can the claim be disallowed. Given the relative difficulty and cost of litigating such claims, this is not, in my opinion, a large concession. Consumers retain their rights under the Truth in Lending Act to bring a claim under its provisions and recovery (puny) statutory damages. Third, a reduction in a loan's principal balance is only available if the homeowner certifies they contacted the lender to modify the loan before bankruptcy. Note that the "reduction in principal" is only ONE of the options available to bankruptcy courts. Apparently, the court could freeze or adjust interest rates or extend the term of a loan even if a borrower had not contacted the lender. The only problem I see here is if lenders begin litigating whether the borrower has indeed contacted the lender. Borrowers who did so by phone won't have great records of having done so. I would advise borrowers who call to also send a written letter and keep a copy asking for a modification.

Apparently, the news of the Citi's support for the legislation traveled fast and yesterday at chapter 13 confirmation hearings around the country, debtors asked to have their hearings continued to see if the legislation passed. I also wonder what are the options for homeowners who filed chapter 13 a few years or months ago and were not able to modify their home mortgages. Can they ask the court to modify their plan if the legislation passes?

Student Writing Competition on Bankruptcy

posted by Katie Porter

Aspiring bankruptcy geeks (I surely mean experts) and their law professors take note: the National Association of Chapter Thirteen Trustees is sponsoring a law student writing competition. The paper can be on any issue that concerns chapter 13. The winner will receive a prize and the winning paper will be published in the NACTT Quarterly. The deadline is April 30th. The complete announcement is available on the NACTT website.

Fellowships for Consumer Debt Book

posted by Katie Porter

Just a brief announcement for our academic audience (law or non-law) that I am directing the University of Iowa's Obermann Summer Seminar in 2009. Up to 6 fellowships of $2250 (plus an award of $1250 to cover travel, housing, per diem) are available for participating scholars to participate in the seminar, which will be held June 7-14 in Iowa City, Iowa. Selected scholars will have access to the 2007 Consumer Bankruptcy Project data in advance of the seminar to prepare an empirical paper on consumer debt or bankruptcy. These papers will be collected into a volume for publication with an academic press. Interdisciplinary applications are particularly encouraged but law professors are obviously welcome. The full call for proposals and application guideines are available here. The deadline for application is Tuesday December 9, 2008.

Creditors: Fear Not?

posted by Katie Porter

Just as public ire at the mortgage industry reaches a pinnacle, courts have offered the mortgage companies refuge from their mistreatment of consumers in some recent rulings. While these decisions may be aberrations, they have powerful lessons for consumer debtors and their attorneys that bear some discussion.

A bankruptcy court ruled last week that the United States Trustee (UST) lacked the authority to bring a complaint against Countrywide for abusive mortgage servicing practices. (Hat tip to Amir Efrati at the Wall Street Journal for bringing the ruling to my attention.)The In re Sanchez court concludes that the UST failed to state a claim for sanctions because the UST is not authorized to pursue sanctions. I disagree.

Continue reading "Creditors: Fear Not? " »

What Happens to Homeowners in Bankruptcy?

posted by Katie Porter

Amending bankruptcy law to permit judges to modify home loans for chapter 13 debtors does not seem to be gaining traction in Congress, despite the fiasco with the bailout vote and pressure to incorporate more "Main Street" provisions. For many reasons, I remain convinced that any bailout should attempt to limit losses at the family-level, rather than addressing only the end consequences for major financial institutions. That said, does filing bankruptcy improve a family's chances of saving its home?

A new paper, The Homeownership Experience of Households in Bankruptcy, by economists Sarah Carroll and Wenli Li provides a tenative answer to this question. Before summarizing the findings, let me emphasize a few key points. The paper's sample comes from Delaware. Yup, that's it. That limits my confidence, and to their credit, the authors' confidence, about extrapolating these findings to the whole nation. Another difficulty is that the housing market has changed so rapidly that despite the authors' quick production of this study, the mortgages of today's families may look very different from those of families that filed bankruptcy in 2002. Keeping those qualifications in mind, what do Carroll & Li report on how many homeowners that file bankruptcy avoid foreclosure.

Continue reading "What Happens to Homeowners in Bankruptcy?" »

It's Easier to Shoot Roadkill than Big Game

posted by Katie Porter

I'm a little miffed about the recent FTC settlement with Bear Stearns and its subsidiary, EMC Mortgage Corporation. The complaint alleged that EMC engaged in unlawful practices in servicing consumers' home mortgage loans, including violating the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, and the Truth in Lending Act. The FTC brought the complaint pursuant to its enforcement authority to regulate unfair and deceptive practices. A recently announced settlement requires Bear and EMC to pay $28 million to the FTC and enjoins the company from engaging in the alleged illegal practices. Given my concern about poor mortgage servicing, you might expect me to have nothing but praise for the FTC.

Continue reading "It's Easier to Shoot Roadkill than Big Game" »

Be Careful What You Wish For

posted by Katie Porter

At legislative hearings on credit card legislation, bank industry representatives have emphasized that they are voluntarily improving practices (but see here for whether to take those promises seriously) and have argued that Congress should avoid legislating credit cards because federal regulators are better suited to the task. They proffer all the standard arguments about the relative benefits of regulation (agency expertise, flexibility, cooperative solutions, etc), and largely these arguments have worked. Despite hearings every year when members of Congress tell their own, their families' or their constituents' credit card horror stories, the legislation dies. The outcome has been that regulators continue as the primary actors in control of credit cards. In the last two decades, this has translated to little, if any, regulation of credit cards.

Increasingly, there are signs that the regulatory winds are changing (even as the administration and its regulators stay the same). Credit card companies might soon regret their pleas to "let the regulators do their jobs" if the regulators actually start using their authority in ways that equal or go beyond the relatively tame proposed legislation. A case in point is the recent FDIC and FTC action against subprime card issuers that seeks over $200 million in restitution for consumers.

Continue reading "Be Careful What You Wish For" »

The Slow Road to Recovery

posted by Katie Porter

Lois Lupica, a bankruptcy professor at the University of Maine, has co-authored A Study of Consumers' Post-Discharge Finances: Struggle, Stasis or Fresh Start, (spring 2008 issue of the American Bankruptcy Institute Law Review) on the long-term consequences of filing bankruptcy. Using data from a large national sample (the National Longitudinal Survey of Youth 1979), Lupica and Zagorsky report that among the study's cohort (people who are now in their mid-40s), 13.7% have filed a bankruptcy case. The core of the analysis is a comparison of bankruptcy filers and non-bankruptcy filers in the sample to examine whether debtors recover after bankruptcy, and importantly, how long that process might take. The findings are mixed.

As a group, bankruptcy filers are more likely to be divorced, female, less educated, live in an urban area, and have a bigger family than those who report not having filed bankruptcy. These data are largely consistent with the prior research of Dr. Teresa Sullivan, Elizabeth Warren, and Jay Westbrook about the characteristics of families at the time of their bankruptcy. However, people who have filed bankruptcy, even years ago in the past, continue to earn much lower wages than those who have never filed bankruptcy. In short, below-average income is a troubling, but enduring, quality of families who seek bankruptcy relief. This conclusion dovetails with the work that Deborah Thorne and I did on the one-year outcomes from chapter 7 bankruptcy, which suggested the importance of stable or rising income to a fresh start. As Lupica & Zagorsky admit, their sample is people in their mid-40s. The trajectory of recovery could look different for people who file bankruptcy later in life or could be different for post-BAPCPA debtors or even for those who filed in the early 1990s as opposed to those who filed in the last few years because of a changing social safety net. More work is needed, but this study single-handedly doubles our collective research on the longitudinal effects of bankruptcy. It's well worth a read.

Enjoyable but not Educational? Debtor Financial Management

posted by Katie Porter

In May, the Executive Office for the U.S. Trustee released another of the studies mandated by the new bankruptcy law. I expressed optimism in this symposium piece that this research may be a bright spot to emerge from BAPCPA but the results so far have been quite mixed (the pretty good and the awful). The latest study purports to evaluate the postbankruptcy financial education that all individuals with consumer debts are required to complete to receive a discharge. The study considered three curricula: one developed by the Chapter 13 trustees (TEN), one developed a private credit counseling agency, and the EOUST's own program.

Across these providers, 97 percent of bankruptcy debtors reported that they would recommend the program to others and 97 percent agreed with the statement that their overall ability to manage their finances had improved as a result of the educational course. This is consistent with a finding from the Consumer Bankruptcy Project that Dr. Deborah Thorne and I reported here--debtors seem to believe that financial education is useful. However, there were very, very few measurable improvements in debtor's actual financial knowledge after the course and only about 22 percent of debtors who could be interviewed three months later had adopted any recommended change to their financial practices. The findings seem to suggest that while financial education makes people feel optimistic about their financial prospects, it may have a much, much more limited effect on knowledge and behavior. The policy take-away remains ambiguous. Like so many other things, whether bankruptcy financial education continues will probably turn more on politics and public perception than hard evidence in either direction.

Debtors Win Victories Against Mortgage Servicers

posted by Katie Porter

In the last few weeks, several courts have issued opinions ruling that mortgage servicers' actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I've previously posted a bit on the basics of mortgage servicing and why it's an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer's misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers' actions seriously. While I'm convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

Continue reading "Debtors Win Victories Against Mortgage Servicers" »

The REALLY Sad State of Mortgage Servicing

posted by Katie Porter

In 2003, Chapter 13 trustee Henry Hildebrand III wrote a short piece for the American Bankruptcy Institute magazine entitled the Sad State of Mortgage Servicing. On the front lines of chapter 13 every day, Hildebrand was one of the first people to draw national attention to the problems of mortgage servicing in bankruptcy. The mortgage servicers didn't like the characterization, but years later, even after a Senate hearing and major media coverage of the problem, the description is still apt.

A customer legally tape-recorded his conversation with his mortgage servicer, one of the nation's largest financial institutions (and no, it's not Countrywide!) His attorney shared it with me, and I'm posting some excerpts after the jump. I won't give away all the fun, but as you read, remember that mortgage servicing agents are the people on the front-lines of purported foreclosure prevention efforts. Without better training of servicing agents and regulation of mortgage servicers' financial incentives, is it any wonder that we continue to see loss mitigation stall while foreclosures spiral upward? 

Continue reading "The REALLY Sad State of Mortgage Servicing" »

Apple Pie, Fireworks, and the Financial Squeeze

posted by Katie Porter

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. 

Fewer Frisbees on Tennessee Campuses This Fall

posted by Katie Porter

Every fall as the Credit Slips bloggers prepare to begin teaching, we are treated to the sight of tables, tents, and marketing literature aimed at marketing credit cards to college students. This year, those familiar signs won't be appearing on the campuses of the University of Tennessee system. On May 21, 2008, Tennessee enacted a law prohibiting credit card issuers from recruiting students on campus or through university facilities or student organizations. (There is an exception for "days when there are athletic events" so presumably home football games retain their usefulness for credit card issuers). The bill also requires the University of Tennessee institutions that receives funds from student credit cards or from the use of the school name or logo on credit cards to disclose the amount of money received and how the money was used.

Calls for restricting credit card marketing to students are nothing new (see here and here and here) but I think this is the first law to be enacted that absolutely bans campus marketing. I'm confident the credit industry will challenge the bill, probably on preemption grounds, arguing that as the state of Tennessee lacks authority to regulate national banks. I think that argument should fail. The state isn't banning credit cards as a matter of general commerce; the legislature is acting in its role as overseer of the state's educational institutions.  If an institution itself (Rochester Institute of Technology, University of New Mexico) can ban or sharply limit the solicitation of students for credit cards, I think a state legislature can enact the same prohibition for the campuses that it controls.

Vulture Mentality of Piling On Fees or Countercyclical Diversification Strategy

posted by Katie Porter

In the recent hearing on mortgage servicing, the Senators probed Countrywide's chief executive for loan administration, Steve Bailey, on exactly how mortgage servicers (distinct from the owners of the mortgage) make their profits. Mr. Bailey confirmed the description in my article of the three ways that servicers earn revenue: a fee that is a percentage of the mortgage, float income from interest on temporarily-held funds, and retained fees such as late charges and other fees that are paid by borrowers.  Senator Schumer described the imposition of these default costs as "piling on" and expressed a fear that a "vulture mentality" was developing among servicers as defaults rise. Mr. Bailey tried to diffuse these concerns, but Senator Schumer called him to task in attempting to deny that servicers can and do generate profit from delinquent homeowners, even when borrowers and loan holders might benefit if the family retained its home, rather than struggle to pay an avalanche of default costs. The Senator quoted from a Countrywide earnings' call that characterized the "piling on" practice as a "counter-cyclical diversification strategy."

Continue reading "Vulture Mentality of Piling On Fees or Countercyclical Diversification Strategy" »

Senate Investigates Mortgage Servicing

posted by Katie Porter

Last week, I testified before a subcomittee of the U.S. Senate Judiciary committee about mortgage servicing in bankruptcy. You can read the written testimony or watch a webcast. Both the Chair of the subcommittee, Senator Schumer, and the Ranking Member, Senator Sessions had some harsh words for the current state of mortgage servicing in bankruptcy. Apparently (and encouragingly, at least to me), charging people only what they owe is a bipartisan issue.

Robin Atchley, a former homeowner from Georgia, testified about how her "bankruptcy case was a tug of war with Countrywide over our house." It was a war that the Atchleys lost, deciding to throw in the towel when their son, Payden, insisted that the couple use his lunch money to help pay the mortgage payments. From her perspective, rather than giving them a fair chance to save their "dream home", the bankruptcy process gave Countrywide even more opportunities to profit. The Today show profiled the Atchleys, whose case is now the subject of a lawsuit by the U.S. Trustee's office.

Continue reading "Senate Investigates Mortgage Servicing" »

Call for Papers on Regulation of Financial Institutions

posted by Katie Porter

The Association of American Law Schools Section on Financial Institutions and Consumer Financial Services Program for the 2009 Annual Meeting (January in San Diego) has announced its topic: Does Modern Financial Institution Regulation Work? Reflections on Deregulation and Internationalization of Supervisory Standards. The program will consider these, and other, questions: 

  • Did deregulation through the Gramm-Leach-Bliley Act save an anachronistic industry or did it create opportunities for abuse?
  • Have our enormous investments in capital regulation and our increasing reliance on risk-based models paid off?
  • Will structural reforms abroad, the subprime crisis, and the Treasury’s Blueprint serve as an impetus for the United States to address its complex and, arguably, inefficient agency structure?

Law teachers and other scholars are invited to submit manuscripts dealing with any aspect of the foregoing topic. Junior faculty members are particularly encouraged to submit manuscripts. A review committee will invite the author(s) of each selected paper to make a presentation at the program session. Please send manuscripts to the Program Chair, Heidi Mandanis Schooner, Catholic University, no later than August 1, 2008.

Thank you to Judge Eugene Wedoff

posted by Katie Porter

The Credit Slips bloggers thank Judge Eugene Wedoff, U.S. Bankruptcy Court for the Northern District of Illinois, for his participation as a guest blogger last week. His posts identified a number of important consumer bankruptcy issues, including student loans, the means test, and the potential of rule-making to address issues in bankruptcy cases.  We are grateful to Judge Wedoff for being the first judge to participate in Credit Slips. The bankruptcy judges are on the front lines of addressing the problems of serious financial distress, and we have much to learn from their perspectives.

Welcome to Judge Eugene Wedoff

posted by Katie Porter

I'm delighted to introduce Eugene Wedoff, who will be the first judge to guest blog at Credit Slips. He is a judge in the U.S. Bankruptcy Court in the Northern District of Illinois, a position that he has held since 1987. Last year, he concluded a five-year term as Chief Judge of that district. Judge Wedoff has overseen thousands of consumer and business bankruptcy cases, including the Chapter 11 reorganization bankruptcy of United Airlines. He has authored influential articles on the means testing, the provisions added to the Bankruptcy Code in 2005 to screen consumer debtors for eligibility for Chapter 7 bankruptcy. Judge Wedoff is a member of all the prestigious bankruptcy professional organizations (each of which has their own fancy acronym (NCBJ, ABI, AMC, and NBRC)). He's one of the brightest minds in the world of bankruptcy, and I hope our readers will join me in welcoming him.

The Future of Mortgage Servicing

posted by Katie Porter

In my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower's information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point--mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn't gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

Negotiating with the Mortgage Company

posted by Katie Porter

At the heart of a loan modification is communication between a creditor and a debtor that leads to an agreement on new contract terms. If the debtor cannot get reach a person with authority to negotiate, a modification won't be possible. If the creditor can't get the debtor to return its calls or read its mail, a modification also won't be possible. The communication problems in today's securitized mortgage market are very different than during past real estate downturns, such as the Midwest farm crisis of the 1980s or the wave of foreclosures in the 1930s. Why? Because of the widespread use of mortgage servicers, third-party agents who collect payments from borrowers and remit them to the mortgage note holders (usually investors, often via a trust). Mortgage servicers are responsible for enforcing defaults, including pursuing foreclosures, and for engaging in loss mitigation. Gone are the days of sitting down with the bank that originated your loan and negotiating a new deal. Why am I making this very basic point? Because I am concerned that policymakers, including legislators, judges, and regulators still do not understand the barrier that loan servicing presents to voluntary or consensual loan modification.

Continue reading "Negotiating with the Mortgage Company" »

IRS Should Have Gone for a Baker's Dozen with RAL

posted by Katie Porter

Each year the IRS releases a Dirty Dozen of tax scams. I wish the 2008 list had labeled another practice a scam--refund anticipation loans or RALs. A RAL is a short-term cash advance against an anticipated tax return. Essentially, the taxpayer is paying to access their own money immediately rather than waiting for the IRS to process their refund. There are about 9 million RALs made each year, with APRs ranging from 50% to 500%. Perhaps their high fees are justified by the fact that they are short-term loans. On the other hand, the tax preparers have a lock on this market, which could reduce competition. It seems hard to believe that the risks of nonpayment are very significant when the amount of the refund is being determined during the tax preparation process and the preparer captures the refund directly, rather than relying on voluntary remittance from the debtor.

The IRS does warn against "dishonest" tax return preparers who "make their money by skimming a portion of their clients’ refunds." Although most leading preparers offer RALs, I think RALs are "making money by skimming clients' refunds."

Continue reading "IRS Should Have Gone for a Baker's Dozen with RAL" »

Call for Papers "Real Estate Transactions in Troubled Times"

posted by Katie Porter

The American Association of Law Schools is having its 2009 Annual Meeting in January in San Diego. The section on Creditors' and Debtors' Rights and the section on Real Estate Transactions are planning a three-hour extended program on Real Estate Transactions in Troubled Times. The speakers will be selected by a submission of papers, which are due April 10, 2008, and can include early works in progress. Practitioners are eligible to submit papers for consideration, as are adjunct professors or professors in other fields (although the bulk of presenters will be law professors). The entire call for papers is after the jump.

Continue reading "Call for Papers "Real Estate Transactions in Troubled Times"" »

Welcome to Paige Marta Skiba and Jeremy Tobacman

posted by Katie Porter

Credit Slips welcomes Paige Marta Skiba, a behavioral economist who studies payday lending. She earned her Ph.D in economics from the University of California, Berkeley in 2007 and is currently an assistant (corrected 6/24/08) professor of law at Vanderbilt Law School. She'll be joined in some or all her posts by her frequent co-author, Jeremy Tobacman, who is a postdoctoral fellow in the Department of Economics at Oxford University. Their current research uses a dataset from a payday lender with two million loan records to examine questions about the profitability of payday lenders, the relationship between payday borrowing and bankruptcy, and consumer behavior in payday-loan borrowing and default. With financial distress on the rise in America, payday lending looks like a growth industry. We look forward to reading more about their findings and thank them in advance for sharing their behavioral economics perspective on consumer borrowing.

Payment Cards Continue Global Growth

posted by Katie Porter

While Americans continue to lead the world in credit card spending, other forms of plastic payment such as debit cards continue to have an edge in other nations. Overall, Ronald Mann reports that global spending on credit and debit cards has quadrupled in the last ten years to $5.2 billion. In 2006, card spending represented 11 percent of global GDP. In a new piece for Foreign Policy, Mann provides a quick look at the available data on trends in plastic payment around the world, updating the findings on global card spending that he presents in his book, Charging Ahead. As additional encouragement to check it out, let me report that the Foreign Policy piece is loaded with really fun graphics; my favorite is the little figure carrying a huge credit card on his back in Atlas-like fashion.

Prof. Mann's piece reminded me of an interesting story on NPR's Marketplace a few months ago about the role of credit cards in China. Scott Tong reported that many younger Chinese consumers are eager to get a credit card; like their American counterparts on college campuses they like the T-shirts, toasters, or other freebies that are offered in return for signing up for a card. But the growth in actual card use remains slower than banks are used to seeing in American customers. While credit cards are increasingly a global phenomenon, there remain important differences in their use that reflect historical trends in payment systems, the cultural norms of consumers, and macroeconomic conditions.

Unmerchantable McDonalds' Fries? New Commercial Law Blog

posted by Katie Porter

Several law professors have started a new blog, Commercial Law, to offer their thoughts on issues arising under the Uniform Commercial Code or commercial laws. The blog is off to a lively start with daily postings on all sorts of topics, including the status of Revised Article 1 of the UCC, contracts of adhesion, and the future of teaching commercial law.

The post that caught my eye was Jennifer Martin's post on a trio of cases alleging that McDonald's products violate UCC sales provisions, including the warranty of merchantability. While all three cases failed (and I'm in agreement with Prof. Martin about the correctness of those rulings), it's fun to think about how the UCC applies to so many ordinary transactions and to question how these doctrines hold up to shifting societal norms. For contracts or consumer law teachers, the cases provide fun hypothethicals for class, and for all of us who struggle to explain their legal specialty to friends and families, the cases offer an everyday, if somewhat silly, example of commercial disputes.

Surprise!!! You've Earned a Discharge AND a Foreclosure

posted by Katie Porter

Tomorrow, the Senate is expected to vote on the Foreclosure Prevention Act of 2008, Title IV of which would permit bankruptcy courts to modify home mortgages in certain ways if the loan and the debtor met specified criteria. We've described that idea before, but the bill has crucial implications for bankruptcy that are not related to loan modification. Specifically, take a look at section 421, which proposes a solution to a problem with current bankruptcy law. Many Chapter 13 debtors pay for 3 to 5 years on a repayment plan, doing everything the law requires of them, and only a week or two later, face a foreclosure. How does this happen? Because the mortgage servicers frequently assess charges during a bankruptcy case, but fail to disclose these fees. Courts don't approve them; trustees don't adjust the debtor's payments to account for them; and debtors aren't even given notice that these charges are piling up. Instead of emerging from bankruptcy with a fresh start, homeowners find themselves defending a foreclosure or having to immediately pony up hundreds or thousands of dollars. Just last week, Judge Brendan Shannon of the Delaware Bankruptcy Court addressed this issue, challenging lenders to disagree that these undisclosed "surprise" fees don't "frustrate" bankruptcy's home-saving purpose. The Foreclosure Prevention Act of 2008 tackles this problem by requiring mortgage companies to disclose all fees within the earlier of 1 year of assessing the charges or 60 days before the end of the bankruptcy. The law also specifies that a lender may only charge such fees if they are lawful, reasonable, and provided for in the contract. It's sad that this latter requirement is even necessary--it essentially just prohibits mortgage servicers from violating existing law by overcharging consumers, a problem that an increasing body of case law and research suggests occurs with alarming regularity. I see lots of reasons why permitting bankruptcy courts to modify mortgages may be the best comprehensive solution to the foreclosure crisis, but I also hope Congress takes a hard look at the rest of the bill and considers its overall importance. If consumers do their part in bankruptcy and make every payment required by law, the system should honor its promise to give them a financial fresh start.

Webcast on Foreclosure Crisis

posted by Katie Porter

The Cleveland City Council is webcasting a foreclosure forum on Wednesday February 27th from 10am-1pm. Here's the link to watch. The event is timed to coincide with the visits of the Presidential candidates and national media to Ohio. Senator Obama is sending adviser and law professor, Mark Alexander, and Senator Clinton's representative will be Fred Hochberg. McCain has not yet identified who, if anyone, will attend. The foreclosure situation in Cuyahoga County may be the worst in nation, or certainly is a leading contender for that sad distinction. The city is taking some novel approaches, as I learned from Prof. Creola Johnson's presentation at a symposium on Subprime Foreclosures at the University of Utah College of Law earlier this week. I was particularly interested in the problem of abandoned properties, and the practice of many lenders to not file deeds after purchasing a property at a foreclosure sale. That practice makes it very difficult for the city to figure out who is responsible for the upkeep on abandoned properties. The speakers at the Forum will include Cleveland Mayor Jackson, County Treasurer Jim Rokakis, Housing Court Judge Ray Pianka and several community organizations.

Even the US Trustee Has an Occasional "Credit Crunch"

posted by Katie Porter

On January 14, 2008, the US Trustee announced that it has suspended audits of consumer debtors. While consumer advocates have criticized the audits as overzealous and unnecessary, the temporary end of audits occured for a simple (if somewhat, ironic, reason)--the US Trustee is out of money. The 2008 Appropriations Act didn't provide any funding for debtor audits, and consequently the US Trustee has stopped the audits. While the Financial Services Roundtable, a credit industry lobby group, says "nobody" benefits when the watchdog is taken off the job, I suspect many in the consumer bankruptcy bar will applaud the audits' current status as an unfunded mandate.

Homeowners in Trouble--Don't be an industry statistic

posted by Katie Porter

The Mortgage Bankers Association released a study this month that touts the efforts of mortgage servicers and lenders to assist borrowers. The industry asserts that it "took major steps" to "help those borrowers who could be helped." Therein, lies the catch. While apparently relying on self-reporting by mortgage servicers (an industry facing numerous accusations of misconduct (see here and here and here)), even assuming accurate data, the study's methodology gives a big boost to the mortgage industry. How? The study begins by excluding as beyond help all loans on properties that servicers could not confirm the house was occupied by its owner (18%). It also excludes all loans in which the borrower defaulted despite a previous payment plan (29%). Notably, there is no evidence on the parameters of those plans--were debtors given an extra week to cure their mortgages or were these serious modification efforts? Given what we know about modification efforts from public securities filings, there is no way 29% of loans would meet a strong criteria of previous repayment plan. Most disturbingly though, from a policy standpoint, the industry points the finger directly at borrowers. It excludes 29% of loans from the group where it asserts modification is feasible because the "borrower would not respond." In his post on the House hearing on the mortgage modification bill, Prof. Adam Levitin reported on a witness' testimony that families in financial trouble may not respond to phone calls or open mail from creditors. My advice to homeowners--talk to your servicer or open mail from them. Better yet, contact them affirimatively to ask for a loan modification and keep records of your efforts in so doing. Don't be an industry statistic! Beyond this practice advice, the fact that industry says it can't reach 3 in 10 borrowers has important policy implications--including for the fate of the bankruptcy modification bill.

Continue reading "Homeowners in Trouble--Don't be an industry statistic" »

Servicing Kickbacks Alleged in Class Action

posted by Katie Porter

Last week, a class action lawsuit (Harris v. Fidelity National) was filed against Fidelity National Information Services, a huge player in the billion dollar world of mortgage servicing. "What? I've never heard of them," you say. Fidelity is the company that provides default servicing to most of the large residential mortgage servicers. Their role is a shadowy one; unless you've delved deeply into how consumer mortgages are serviced, you probably weren't aware of their existence--much less how they may be driving up costs for consumers. Foreclosure petitions, proofs of claims, and bankruptcy court motions never bear Fidelity's name (instead they are signed by the regular servicers or by local counsel retained by the servicers.) But despite its invisibility, Fidelity is almost always part of the action in foreclosures or bankruptcy cases.

The lawsuit alleges that Fidelity receives illegal kickbacks from attorneys who work under contract with them. The exhibits to the class action are clear. Fidelity bills its clients--the servicers--for certain fees-- for example, $100 to review a bankruptcy plan. The servicer includes those fees as due and owing on bankruptcy proofs of claims, many of which appear only as "attorneys fees" or "postpetition charges." However, Fidelity requires attorneys to let it "retain" $50 of that $100. Fidelty characterizes these as "admin fees" paid by the attorney to Fidelity. The big problem with this practice is that bankruptcy law requires full disclosure of where the debtor's money is going. If the service is getting the debtor to pay these fees, the bankruptcy court should be approving those charges and who is going to receive the debtor's money. At least, that's how the class action has framed the legal issues in the case.

One final note: the schedule of Fidelty's fees includes a line item for "Drafting Missing Documents." Hmmmm . . . If documents are missing, they are missing. I don't see how "drafting" can appropriately play into this. It sounds like more evidence of "recreating" mortgage servicing documents like the actions by Countrywide exposed in the In re Hill case.

Will the "Real" Anti-Foreclosure Mr. Paulson Please Stand Up?

posted by Katie Porter

Yesterday's front page story in the Wall Street Journal was not the usual Paulson story about subprime mortgages---blah, blah Treasury Secretary Henry Paulson has organized mortgage companies to make blah, blah, blah unenforceable promises to offer short-term help to blah, blah homeowners. (Can you see that I share Prof. Elizabeth Warren's skepticism about the "Sandbag" plan?)

This story about Paulson and foreclosures was much more interesting. It profiled John Paulson (no relation), a hedge fund manager who bet big in 2005 that the mortgage market was heading sharply south. Paulson's take home pay in 2007 was reputedly $3 to $4 billion dollars (WOW!). What is he doing with all this money? Well, he's given $15 million of it to the Center for Responsible Lending to fund legal assistance to families facing foreclosure. This is a chunk of change, even for someone with his paycheck, and it is a momumental gift for direct legal services, which typically struggles along on small gifts. Another surprise--John Paulson says in the WSJ that "bankruptcy is the best way to keep homeowners in the home without costing the government any money." This bowled me over; a Wall Street maven backing the pending legislation that would let consumers modify their home mortgages in bankruptcy! I'd say this Paulson won't be making the speaker's list at the next Mortgage Bankers Association meeting, which has strenously opposed the legislation. They'll have to content themselves with the Treasury Secretary.

Continue reading "Will the "Real" Anti-Foreclosure Mr. Paulson Please Stand Up?" »

Mortgage Magic--Recreating Servicing Documents

posted by Katie Porter

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" »

Forget the "Foreclosure Investigator"--File a Lawsuit!

posted by Katie Porter

Elizabeth Warren's recent post asked "What Can a City Do?" about subprime lending. The post prompted many thoughtful comments, both on Credit Slips and on the Calculated Risk blog. While readers were discussing the merits of various ideas, including a city-appointed "Foreclosure Investigator," the city of Baltimore took a much more aggressive tact--it sued Wells Fargo on January 8th. Calling the city a "second victim" after the homeowners, Baltimore filed suit in U.S. District Court alleging that Wells Fargo engaged in predatory and discrimatory subprime mortgage lending. Wells Fargo denies the allegations, which focus on purported steering of black homeowners into high cost loans. The Associated Press reports that "two-thirds of Wells Fargo's foreclosures occurred in neighborhoods that are more than 60 percent black." The city attorneys apparently analyzed foreclosure data, finding that while most lenders had higher foreclosure rates in majority-black communities, that according to the AP, "Wells Fargo stood out having the most glarity racial disparity."

I believe this is the first lawsuit filed by a city as plaintiff to grow out of the current subprime loan crisis, and it seems sure to be controversial. Past Credit Slips guestblogger and law professor, Kathleen Engel, has an article on SSRN for free download entitled "Do Cities Have Standing? Redressing the Externalities of Predatory Lending?" that addresses many of issues that the Baltimore v. Wells Fargo suit will raise.

Is Cheaper Better?

posted by Katie Porter

As part of the 2005 amendments, consumer bankruptcy debtors must complete a financial education course to receive a bankruptcy discharge. The requirement was controversial among law professors, with some seeing the requirement as one of very few reforms that could help consumers and others viewing it primarily as a cumbersome obstacle designed to deter filings or increase the hassle and expense of bankruptcy.  As John Rao noted in his excellent post on the topic, the quality of this education left a lot to be desired. Specifically, he noted that the courses were not tailored to the particular educational needs of bankrupt families. Guestblogger Nathalie Martin shared her experiences as a financial educator on just why tailored education is vitally important.

I have no evidence that these problems have been remedied, but I can report that at least bankrupt families won't have to pay as much for their under-education in the future. I've recently gotten notices from two financial education providers, both of whom are approved nationwide by the United States Trustee. The respective costs of the services are $25 and $15. This is a dramatic drop in price from the $50 that most providers initially charged. Do you get what you pay for? Or is this a good cost-savings for consumers? The most interesting thing about both advertisements was that neither of them contained ANY mention of the quality of their course--no mention of curricular content; quality of intructors; or pedagogical methods. Instead, the programs emphasized their low cost--and non-educational features such as their acceptance of credit cards, and their immediate certificate delivery. If even the financial educators aren't competing on quality--or perceive that doing so is of no use--I think we should be pessimistic that bankruptcy financial education is going to delivery on its promise at any price. 

Call for Banking and Consumer Financial Services Papers

posted by Katie Porter

The University of Connecticut School of Law is hosting a Junior Scholar Workshop on Banking and Cosnumer Financial Services Law on May 28-29th. Consumer Financial Services is certainly a hot area of policymaking right now, and this academic conference promises to be exciting and timely.

Papers may be submitted by any law faculty with less than eight years of teaching, and may be on topics, including, but not limited to:

  • State and federal supervision and regulation of bank safety and soundness
  • Consumer financial services and the regulation of those services
  • Payment systems and other topics of commercial law relating to consumer banking
  • Legal implications of bank-based systems of finance; and
  • International banking principles, supervision and regulation

Submissions are due Friday February 29th and may either be in the form of a full paper or a precis of 800-1200 words. To submit a paper or for more information, contact Prof. Patricia McCoy at the University of Connecticut School of Law.

Bankruptcy Blasphemy: (Continued) Embarrassment for the Wall Street Journal

posted by Katie Porter

Most days, I enjoy reading the Wall Street Journal. But I may have to cancel my subscription if the editors continue to miseducate the public and embarrass themselves about the pending legislation to allow for the modification of home mortgages in bankruptcy. On December 13th's Opinion page, the Wall Street Journal lauded itself for warning "in October about this legislation, which would allow bankruptcy judges to treat mortgage debt the same as credit-card debt." The Wall Street Journal in October did say the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt."

The problem is that BOTH OF THESE STATEMENTS ARE NOT FACTUALLY ACCURATE. Stop writing them!  There is no pending legislation that proposes to treat mortgage debt the "same" (or even "similar to") the way credit card debt is treated in bankruptcy. A fact-checker should not let these statements go to print. This is not a matter of speculative or normative disagreement between the Wall Street Journal and me about what the effect would be on interest rates if consumers could modify their home mortgages in bankruptcy--neither of us knows that for sure, and they can certainly assert their belief that if the Conyers bill becomes law mortgage interest rates will climb to credit card rates (and I'll respectfully disagree). They should not, however, make clear misstatements about pending legislation or existing law. As a number of Credit Slips posts have explained (see here and here and here), the legislation simply would not transform mortgages into unsecured debt, which is the form of most credit cards. Even if the bill passed, the mortgage liens would remain valid; the lenders would have the ability to foreclose on property if they were not paid. And there would be no ability to discharge the debt in a Chapter 7 proceeding (as there is in most instances for credit cards). 

I did benefit from reading the editorial. In addition to learning that the Wall Street Journal doesn't read Credit Slips, and apparently hasn't read the Bankruptcy Code or the Conyers bill very carefully either, I got a chuckle out of the sarcastic reference to Justice Stevens as a Cato Institute fellowship winner.

Continue reading "Bankruptcy Blasphemy: (Continued) Embarrassment for the Wall Street Journal" »

New Twist on "Making a Federal Case Out of It"

posted by Katie Porter

Have you heard that expression, "Don't make a federal case out of it?" It's usually used to caution against blowing something out of proportion. Two recent decisions from federal courts in Ohio explained why the courts have an obligation to take issues of standing seriously and made clear that if you want to make a federal case out of it, you have to follow the federal court's rules. As Elizabeth Warren explained, the decisions are a reminder that the law matters. And in federal court, at least some judges are going to require the lenders to follow **all** the rules, an outcome that the lenders apparently asserted was not the situation in state court.

But why are these foreclosures in federal court? Foreclosure is a state law action, and a vast majority of such actions are filed in state courts. Apparently, the holders of the mortgages (or should I say "putative" holders of the mortgages?) are frustrated that some state courts in Ohio and other jurisdictions are taking a long time to adjudicate foreclosure cases. The cause of the delay is that the state courts are overwhelmed by the sheer number of foreclosure actions being filed. In many jurisdictions, foreclosures go to a specially-designated division of state court and as foreclosure rates have climbed rapidly, these judges and their staffs can't keep up with the backlog.

Continue reading "New Twist on "Making a Federal Case Out of It"" »

No Charge to Call Your Mortgage Servicer?

posted by Katie Porter

William Launder at American Banker did a story about my earlier Credit Slips post, What do Phone Sex and Mortgage Servicing Have in Common? In the post, I reported on an actual mortgage proof of claim that listed a the creditor's phone number that was a toll service that charged $9.99 per minute. After calling several people at Household Finance Corp and its parent, HSBC, Mr. Launder concludes in his story that the phone number was the result of a typographical error, a possibility that I acknowledged in my initial post. HSBC said that the misprinted phone number was an "isolated incident of error." However, HSBC never responded to the debtor's objection, causing the debtor's attorney and the court to need to take further action by entering an order resolving the objection in the debtor's favor. Additionally, the Chapter 13 trustee spent time trying to contact the servicer and did not have any other contact information than the mistaken toll-charge number. The effect of the servicer's mistake was to tax the bankruptcy system.

I'm glad to know that borrowers aren't being charged a per minute fee to talk to their mortgage servicers. That's a welcome change from standard servicing practices that do charge consumers to receive information: payoff statement fees, fax fees, email fees, etc. In this case, the debtors were fortunate. Their attorney didn't charge them additional legal fees to file the objection. As a general matter, however, the costs of servicing errors fall on debtors, who are already cash-strapped and struggling to save their homes.


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