The Alphabet Problem and the Pooling and Servicing Agreements

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

What Does RESPA Have to do with Consumer Bankruptcy Cases?

I have trained over 350 attorneys at my Bankruptcy Boot Camps and to my surprise less than 10 percent know what I mean when I refer to a "QWR." This is shocking in that a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor's money and the disbursements on the arrearage claim from the Chapter 13 Trustee. It can also be used to identify all of the "ancillary fees" and "collateral charges" that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account, without any notice or the right to a hearing.

The provisions of RESPA which deal with mortgage servicing are generally found in either 12 U.S.C. § 2605 or § 2609. Section 2605, known as the "Servicer Act," requires servicers to respond to borrower requests for information and correction of account errors. The "Servicer Act" provisions are where you find the authority for a Qualified Written Request. The Servicer Act provisions in § 2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in § 2605(f).

In Favor of the Consumer Financial Protection Agency (CFPA)

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Bullshit--Professionally Speaking

I don't get to post very often right now, but sometimes I can put on my academic robes and talk about a new piece of scholarship. And what better thing to talk about when wearing academic robes than bullshit?

Curtis Bridgeman and Karen Sandrik have written a new piece called Bullshit Promises. The piece focuses on contract language that is designed to make someone believe that something has been promised (e.g., a promise of a fixed interest rate highlighted in the contract) while buried somewhere else is another provision that takes away that right (e.g., reservation to change terms at any time).  The result is a "bullshit promise," something that will mislead--all within the bounds of current contract and tort law.  

Colonel Ken

Colonel Ken Allard is no whiner.  He's military tough, a firm believer in personal responsibility.  But he has been so badly treated by Bank of America that he decided to go public, here and here.  Along the way, he picked up stories from other folks about their treatment at the hands of B of A.

I like the colonel.  He has the sort of "I'll fix it myself" view of injustice that makes me root for him. But I read his story and I wonder:  how many people will be cheated, scammed, tricked, ignored and generally infuriated before someone says it is time to put some basic supervision in place.

Reading Redux

Last year around this time, I wrote a Credit Slips post about a law-professor friend whose realtor expressed shock and dismay when she and her husband insisted on reading every document she gave them to sign regarding the house they were purchasing.  In the post, I somewhat sanctimoniously referred to myself as someone who always reads her contracts.  This year, it was my turn, and I have to admit that I did not pass my own test.

I faithfully read every home-purchasing form contract my realtor and lender sent me from the day I made the offer until the day before closing.  I even actually managed to do something productive for all my trouble; I switched inspectors because the first one insisted on a rights-waiving contract.  But partway through the closing itself, faced with two inches of papers to sign, my resolve wavered.  I was tired and hungry, and my mind kept circling around to all the moving-related errands I needed to do in Austin before the end of business hours and my flight out of town the next day.  (A word to the wise:  Never go to a closing on an empty stomach.)  So I took a few shortcuts.

Why Is This Legal?

Are there some deals that are so bad that they shouldn't occur?  Or it is enough to say that people have choices, and if they make bad choices, tough?

I had lunch with a bankruptcy lawyer, who followed up with an email story:

Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

What Do Phone Sex & Mortgage Servicing Have in Common?

Question: What do phone sex and mortgage servicing have in common?

Answer: They both cost $9.99 a minute.

This isn't a joke. It's a real-life example of the difficulties that consumers sometimes face in working with their mortgage servicers. As part of a study of mortgage claims that I'm conducting, I came across an objection to a mortgage claim where the debtor asked for the court's help to avoid paying $9.99 a minute to talk with his mortgage servicer. The mortgage company had filed SIX duplicate claims, each for an identical amount. These claims were not marked as amended claims, so the debtor wanted to ensure that he only was on the hook for his mortgage debt one time. Since these claims were obviously mistakes, the question is why didn't the debtor just contact the creditor and tell them--"Hey, stop spitting out these claims and withdraw the extras and let's just get on with this bankruptcy." In fact, the debtor's attorney and the Chapter 13 trustee both tried to do just that. They called up the creditor at the listed phone number, but were directed to call another number if they needed actual assistance. The hitch--that other number required them to pay $9.99 A MINUTE. Frustrated, the debtor's attorney went the formal route and filed a claims objection, which I've put below the jump.(Click on it to see it big enough to read clearly; you may need to adjust to 50% in the picture viewer to see the bottom). 

Bad Hippo

The New York Times has a double dose of consumer credit pieces today. If you haven't seen them yet, the first is an editorial about the intersection of bankruptcy law and the rise in home foreclosures.  Interestingly, the editorial's primary concern is not with the changes from 2005, but about a 30-year-old provision prohibiting the modification of repayment terms on primary residence mortgages in Chapter 13. The editorial argues that this provision may have been sensible when most mortgages were straight-forward, low-risk loans, but that with the rise of riskier, more complicated mortgage products, courts need more discretion to protect homeowners.

Second is Erik Eckholm’s article, "Enticing Ad, Little Cash and Then a Lot of Regret" about the new wave of mail-order-financed computer companies, such as BlueHippo, Circuit Micro, and Financing Alternatives, where customers make small installment payments through bank-account deductions in exchange for computers that (ideally) arrive by mail. I had heard BlueHippo’s radio ads and wondered about the service. I have my own variation on the motto, "if it seems too good to be true, it probably is," which is that, "if it's a new, heavily advertised financing option aimed at low-income people that seems reasonable at first, it's probably not." So I'd assumed there was something fishy about the service, but I hadn't had a chance to look into it. Fortunately, the New York Times did the investigation for me.  It turns out that Better Business Bureaus across the country have been flooded with complaints about these services. Financing Alternatives is currently the Norfolk, Virginia office's number one subject of complaints. The Orange County office has had a similar relationship with Circuit Micro. And attorneys general in Maryland, Illinois, and West Virginia have taken action against BlueHippo.

In theory, a service that enables low-income consumers to buy computers using small payments over time is a good idea. These days, computer competence is a basic prerequisite of upward-mobility. Most higher educational institutions assume (or require) that their students have computers. Obtaining the skills to compete with their middle-class, My Space-entrenched peers is crucial for the younger generation of low-income people. For low-income parents who want their children to do well, finding them a computer is a pressing concern. There are two major problems with these computer sellers, however. 

Behavioral Biases and Consumer Credit Markets

Bob promised that I will talk about "behavioral biases that affect consumer credit markets."  Since I don't want to disappoint anyone, let me say a few words about this subject.  You don't have to be a psychologist (I am not a psychologist) to recognize that consumers are subject to biases and that biases affect markets, specifically credit markets.  Myopic consumers underestimate how much they will borrow on their credit card.  Optimistic consumers underestimate the likelihood of suffering financial hardship that will make it difficult to repay mortgage debt, credit card debt or any other type of debt.  Etc'.  Biases, and mistakes more generally, reduce consumer welfare.  No surprise so far. 

What is more interesting to me is the interaction between consumer mistakes and market forces (perhaps this is because I am an economist).  How do markets respond to consumer mistakes?  How do sophisticated sellers and lenders on the supply side of the market respond to biases and mistakes on the demand side of the market?  Such responses are common.  Rebate pricing responds to consumer overestimation of the likelihood of rebate redemption.  Low printer prices and high ink prices respond to underestimation of printer and ink use.  And credit card teaser rates respond to consumers' underestimation of the likelihood that they will stick around long enough to pay the high post-introductory rates.  (I should emphasize that these pricing schemes can also be explained within a no-mistake, rational choice framework; but, as I argue elsewhere, these alternative explanations are only partially successful.)

Market reactions to consumer mistakes are interesting in their own right.  But my interest in them is mainly functional.  First, market reactions to consumer mistakes often exacerbate the welfare costs of mistakes.  Second, market reactions provide evidence for the persistence of consumer mistakes.  This merits some elaboration.  That consumers make mistakes is self-evident.  But the persistence of these mistakes in any given market is far from evident.  Consumers learn from their mistakes and sellers often have powerful incentives to correct consumer mistakes.  Accordingly, an important question is whether the mistake persists, since only a persistent mistake can justify legal intervention.  And since mistakes are often difficult to observe and measure directly, looking at market reactions to these mistakes provides an indirect way to identify the mistakes.  In a sense, this is an example of the researcher delegating a research task to the market.  If I can't tell whether a mistake is robust and persistent in a given market context, I'll simply ask the market.  Sellers will only respond to mistakes that are sufficiently robust and persistent.  And seller responses, specifically pricing strategies, are generally much more readily observable than the underlying mistake.

Paying for the Privilege to Pay

During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.

Commercial Law Beats Out Crim for Excitement (Who Knew?)

My colleague, Carissa Byrne Hessick, was a guest blogger on PrawfsBlog last week.  Although she wrote several interesting posts in her field of criminal law, she was disappointed that she received by far the most comments on her “non-academic” post about buying a house. 

Far from being non-academic, the post and comments comprise a nice mini-debate on the virtues and pitfalls of reading contracts before you sign them.  Carissa’s post is about her realtor’s shock when she and her husband (also a law professor) actually read the various agreements she gave them to sign.  The reader responses give several accounts of the reasons why people don’t read consumer contracts.  The common issue of not understanding them anyway is undoubtedly less relevant for people who read legal blogs than for your average consumer, but even this legally sophisticated crowd had faced obstacles when attempting to read consumer contracts before signing.  It’s socially awkward.  Because so few people read these contracts, time for reading is rarely built into the process, and you usually have to read while the realtor or sales person sits impatiently and watches you.  One person compared those of us who read our contracts to people who cannot order restaurant meals without making a million changes and substitutions.  (I *wish* I could make a million changes and substitutions when I read a contract of adhesion.)