Comptroller of Currency Responds to Claims that CRA Contributed to the Subprime Lending Crisis

In a speech before the Enterprise Annual Network Conference today, Comptroller of the Currency John C. Dugan rejected claims that the Community Reinvestment Act was responsible for the subprime lending crisis:

* * * While not perfect, CRA has made a positive contribution to community  revitalization across the country and has generally encouraged sound community development lending, investment, and service initiatives by regulated banking organizations.

CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA. A recent study of 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported high cost loans made to lower-income borrowers within their CRA assessment areas.

Over the last ten years, CRA has helped spur the doubling of lending by banking institutions to small businesses and farms, to more than $2.6 trillion. During this period, those lenders more than tripled community development lending to $371 billion.

Maybe he read Alan White's post!

Courts Mediate Foreclosures

Local courts around the country are implementing mediation programs in order to reduce foreclosure sales and encourage negotiated workouts.  The Philadelphia program  (photos here) is one of the most ambitious, enlisting the aid of hundreds of counselors and volunteer lawyers and mediators.   Senator Spector presided at an October 24 hearing (link to witness testimony) at which participants described some of their successes, as well as the need for more resources for counselors and legal services and volunteer lawyers.  Programs have also been established in Seminole County Florida (click here for the court's order).  The state court systems of Ohio, Connecticut, and New Jersey have also adopted foreclosure mediation programs. These initiatives are certainly deserving of a modest slice of the federal government's bailout money.

Latest Development in Jones Day Trademark Abuse Case

by Paul Alan Levy

A few weeks ago, I commented on the efforts of mega law firm Jones Day to abuse trademark law to suppress articles it didn’t like on a real estate transactions web site, BlockShopper.com.  Jones Day claims that linking to its web site without permission infringes and dilutes its trademark.  Along with EFF and other public interest groups, we also filed a brief as amici curiae explaining why a case like this should have to meet a higher pleading standard, and why allowing cases like this to proceed threatens the free speech rights of the general public.

Earlier this week, the trial judge denied the motion to dismiss on the ground that the complaint contains the right formula of words to plead likelihood of confusion and dilution, without addressing the broader concerns that we raised.  Paradoxically, the judge declined to accept our amicus brief (which Jones Day had opposed), largely on the ground that, supposedly, it did not say anything that the defendants did not say.

The opinion is worth reading as much for what it doesn’t say as for what it does.  The judge ignores the larger issues and gives no guidance to the parties, not to speak of the rest of the world, about what proofs will suffice to create liability or confer adequate defenses.   Of course, it is always up to a judge how much to say to explain his decisions, but this thirteen-page decision is quite remarkable for how little it says.

So the good news is that the issues we raised remain to be considered in the case (we plan to make further amicus submissions when we conclude that the parties’ argument insufficiently address larger concerns).  The bad news is that the chilling effect remains.  Happily, Blockshopper.com seems to be willing to spend on its own defense, but we must worry about the chilling effect of a decision that says, in effect, anyone who doesn’t like your speech can make you spend similarly to defend an abusive trademark claim, so long as they craft a complaint with general language.

State of Texas Objects to Ameritrade Settlement

by Brian Wolfman

A little while back, Public Citizen Litigation Group objected to the proposed settlement in In re Ameritrade Accountholder Litig., No. 3-07-cv-02852-VRW (N.D. Cal.), on behalf of the named plaintiff who instigated the litigation. The case concerns alleged massive security breaches in Ameritrade's on-line stock trading accounts. View our objections to see why we think the settlement stinks.

I'm writing now to tell you that the State of Texas has objected to the settlement. In 2005, Congress passed and President Bush signed the Class Action Fairness Act (CAFA), one provision of which requires the parties to notify state Attorneys General of class action settlements that affect their citizens and to send the AGs certain case documents. Some class action gurus have been skeptical of that requirement, thinking that it would do no more than increase the size of the AGs' circular files. But it appears that Texas's objection to the Ameritrade settlement may have been prompted by the CAFA notice.

Michael S. Barr et al. on Behaviorally Informed Home Mortgage Regulation

Michael S. Barr of Michigan, Sendhil Mullainathan of Harvard's Economics Department and the National Bureau of Economic Research (NBER), and Eldar Shafir of Princeton have co-authored "Behaviorally Informed Home Mortgage Regulation."  Here's the abstract:

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Foreclosure and Modification Data

By Alan White

We now have foreclosure and mortgage modification reports coming from five sources on a periodic basis:  the Mortgage Bankers Association National Delinquency Survey (watch for the 3rd quarter report due the first week of December), the FHFA report on Fannie/Freddie mortgages, the State Foreclosure Prevention Working Group, HOPE NOW and the OCC/OTS mortgage metrics from banks and thrifts.  I have compiled the data into a spreadsheet (Download Excel file here) to facilitate comparisons and tracking of trends.  The different sources cover different segments of the mortage market, which explains some of the variance in the numbers. 

Generally, foreclosure starts and foreclosure sales continue to increase each month.  Modifications increased significantly in the first quarter, but leveled off somewhat over the summer, although HOPE NOW reports a big jump in September.  Foreclosures dipped in September, but that is largely due to the California foreclosure delay resulting from new notice requirements (California and Florida account for 40% of all foreclosure starts).  Expect to see a big jump in October and November when California foreclosures resume.  For now, the crisis continues to deepen, and the voluntary modification effort is still failing to contain the crisis.

Paying (but not overpaying) the Servicers

By Alan White

Why are foreclosures continuing, when each foreclosure results in an average loss of $100,000 and frustrated homeowners and counselors are trying to get reasonable loan workouts?  One of the many answers to this complex question is how mortgage servicers get paid (or don’t). 

Tire Pressure Monitors Save Lives

A post today on this blog expressing grave reservations over the proposed bail out of the auto industry referenced the importance of tire pressure monitors in saving fuel. Tire pressure monitors also save lives. And, importantly, Federal Motor Vehicle Safety Standard No.138 now requires tire pressure monitors in all new passenger cars and small trucks and buses. For a discussion of the safety benefits of tire pressure monitors, see the Second Circuit's 2003 decision in Public Citizen v. Mineta, No. 02-4237.

Bail out Detroit? Not without some conditions.

While I did not like the idea of bailing out Wall Street, I really do not like the idea of bailing out Detroit. Yes, the auto industry is a cornerstone of the American economy. Yes, the collapse of GM, Ford, and Chrysler will deal a powerful blow to an already-reeling market. Yes, this will suck.

But if subprime lending got way out of control, at least lenders were selling products people--and Congress--wanted. Detroit has not built cars people want to drive in decades. I am not alone in thinking that Detroit carmakers are prime examples of businesses that are failing because they ought to: they make bad products that nobody wants to buy.

Sure, there are exceptions, but, by and large, American cars are pretty awful. The best GM models barely accomplish average reliability according to Consumer Reports. Many GM models are "well below average in reliability." Chrysler is even worse. Only Ford is getting better; Consumer Reports says that, excluding some trucks, "Ford's reliability is now on par with good Japanese automakers."

Consumers agree. Ford has not made a profit since 2005, which has nothing to do with the present economic meltdown. GM lost $269 million during 2007, and Chrysler lost a whopping $1.6 billion last year.

If this really is a case of "too big to fail," then Congress must impose some strict conditions on the auto industry, including higher fuel economy and emissions standards, limits on large trucks and SUVs, and maybe tire pressure monitors as standard equipment, since properly-inflated tires could save an awful lot of fuel. Maybe some quality control targets, as well. After all, cars that break frequently result in wasted spare parts and extra transportation costs to move all those spare parts around.

In short, Congress will need to do more than just keep the Big Three on life support. It will need to force Detroit to start innovating once again, and return to the novel idea of selling products consumers want.

Credit Cards -- Less Purchasing Power

In response to current market conditions, the credit card companies are greatly reducing credit limits and increasing fees.  Check out this comprehensive article in today's Washington Post.

Arkansas Supreme Court Strikes Down Payday Loan Law

The Arkansas Supreme Court last week struck down the state's Check-Cashers Act, which authorizes and regulates payday lending in the state, as a violation of the state's constitutional ban on usury. The state's constitution prohibits any loan with an interest rate above 17%. Various payday loan contracts authorized by the statute, however, had rates between 168% and 559%, which the Court held to be "clearly and unmistakably usurious" in violation of the state constitution.

Lobbyists Descend on the Treasury Department Seeking a Piece of the Bailout

Yo! Read this front page article in today's New York Times entitled "Lobbyists Swarm the Treasury for a Helping of the Bailout Pie." A few tidbits: (1) The article suggests that much of the bailout's first installment ($350 billion) may be spoken for by entities other than the banks at whom the bailout was supposedly aimed. (2) At least five international law firms have set up "financial rescue shops" to provide advice and to lobby for clients who may want a piece of the pie. (3) American Express has obtained approval to reinvent itself -- it will become a bank holding company -- "making the giant marketer of credit cards eligible for an infusion" of bailout money. Really worth reading.

Today's Fannie/Freddie Relief Plan

By Alan White
The plan to modify loans controlled by Fannie Mae and Freddie Mac announced today, while a step forward, suffers from two major drawbacks.  First, Fannie and Freddie do not hold most of the delinquent subprime and alt-A mortgages, so the plan will affect only about 10% of delinquent homeowners.  Second, as an extension of the FDIC model for modifying IndyMac mortgages, the plan calls only for monthly payment reductions, not for principal reductions.  While it is a good thing to streamline the process, and set an ambitious target of reducing payments to 38% of income (compared with the 55% standard that prevailed in the subprime market), Fannie and Freddie, like the FDIC, are still proposing to defer mortgage debt that far exceeds home prices, rather than writing it off, i.e. kick the can down the road.  We still need to deal with the servicers and investors who control most of the problem mortgages, and we still need to attack the $10 trillion problem of the overleveraged homeowner.

Obama and Antitrust Policy

Check out this interesting article in today's New York Times concerning antitrust policy. In it, lawyer David Boies explains why, in light of the economic crisis, Obama may not follow his ordinary policy preference for tough antitrust enforcement.

New York Appellate Division Says Class Action Incentive Awards Are Not Permitted

By Brian Wolfman

Here's a surprising class action developement: In Flemming v. Barnwell Nursing Home and Health Facilities, Inc., No. 504328 (Oct. 16, 2008), one of New York's intermediate appellate courts has held that New York law prohibits incentive awards for named plaintiffs in class actions. Incentive awards, particularly lavish ones, have been controversial, but federal judges approve them all the time, as do state court judges. The court in Flemming indicated that federal courts approve incentive awards only in "special circumstances," but that is not accurate. As noted, many federal judges approve them routinely. Question: Are there any other appellate courts that have banned them?

The Case for Homeowner Debt Relief

Today's New York Times reports that nearly a quarter of Americans with mortgages owe more than their home's current value.  One example cited in the story is a homeowner with a $630,000 mortgage from 2005 on a home now worth $420,000.  His interest-only mortgage, once the initial period ends, will require monthly payments of $12,000.  On the other hand, a fixed-rate amortizing 30-year mortgage at 6% for the $420,000 actual home value would require payments of $2,500 (plus taxes and insurance.)  Dropping the rate temporarily to 3% could bring the payment down to $1,800, in the event of a bona fide hardship. 

Or, the lender could foreclose.  It would then incur additional interest advances and foreclosure costs or $20,000 to $30,000 or so while holding the property, and perhaps sell it for $350,000 to $400,000 next year, resulting in a loss to investors (that's us) of $250,000 to $310,000, not to mention a loss of all future interest.

Servicers could provide homeowners an incentive to make payments, and hedge against possible return of home price growth, by offering a principal writedown after 12 months of on-time payments, and linking it to a second mortgage for the difference between the old and the modified mortgage.  The second mortgage should be progressively reduced over five years, to provide equity build-up if home prices do not come back to 2005 levels.  Let's swap homeowner debt for equity, just as we have been doing with banks.

The AALS Annual Conference and Consumer Law

Last year's AALS Conference had a lot for people interested in consumer law, including an interesting talk by CL&P blogger Richard Alderman on arbitration and presentations by others whose scholarship is regularly mentioned on this blog.  Because this year has been an extraordinary one for consumer law--with consumer issues regularly on the front pages, the new Hope for Homeowners program, revisions to Regulation Z and others on the way, amendments to TILA, and many other events mentioned on this blog and elsewhere--it seemed reasonable to expect the Conference this year to be equally informative.  Alas. that seems not to be the case.  I've been able to find the following two panels of interest to consumer law people (and if I've omitted one, please mention it in the comments): The Section on Aging and the Law has a panel titled "Consumer Protection Law and the Elderly: What's New--What's Needed;" the speakers include consumer law scholar Kurt Eggert, Marguerite Angelari, Carolyn L. Dessin, Paul Greenwood, Shepard Lea Krivinskas, Seymour H. Moskowitz, and Marcia Spira.   On Saturday morning, the Sections on Creditors' and Debtors' Rights and Real Estate Transactions are holding a three-hour long joint program, "Real Estate Transactions in Troubled Times."  The program will include a panel on securitization, another on affordable housing, and a third on bankruptcy modifications of mortgages, and speakers include consumer law people like Kurt Eggert (again), Jean Braucher, Adam Levitin, and Tom Plank, as well as Dennis B. Arnold, A.M. Dickerson, Melissa B. Jacoby, Mark S. Scarberry, Marshall E.Tracht and Moderator Daniel B. Bogart.  A possible third program of interest is the Section on Financial Institutions and Consumer Financial Sevices'  "Does Modern Financial Institution Regulation Work? Relections on Deregulation and Internationalization of Supervisory Standards" but the description makes it sound like it is focused more on the regulatory limits to the structure of financial institutions than consumer law. Speakers include my colleague Vince DiLorenzo, Howell Jackson, Adam J. Levitin, Arthur Wilmarth, Erik Gerding, Saule T. Omarova; Heidi Schooner is the moderator (You can find out more about the Conference here).

Am I greedy to want more than that, this year of all years?  Two programs which address consumer protection from the perspective of sections that normally attend to other matters?  If so, as my co-author Dee Pridgen once pointed out to me (in kinder words), I have only myself to blame.  It's not as if I've ever tried to do anything about it.  So I've been exploring the possibility of starting an AALS Section on Consumer Law.  We would need to get people to sign a petition, but I think that's doable.  The real problem is that to the extent we overlap with other sections--such as the Section on Financial Institutions and Consumer Financial Sevices and the Section on Commercial and Related Consumer Law--we would have to get them either to yield some of their jurisdiction to us, or we would have to yield some to them.  The reason we need a section is that by carving up consumer law among various sections, we end up with years in which consumer law receives less attention than it merits.  I think it's significant that the two sections that are holding consumer protection panels this year are not sections that leap out as being consumer law sections, and that the sections that actually mention "consumer" in their name do not seem to be holding panels devoted to consumer law this year (which is not a criticism of them: their jurisdiction goes beyond consumer law and they can't be expected to ignore the other areas within their scope).  Richard Alderman's Houston Conference is fantastic--and was the birthplace of this blog--but that serves a different purpose from an AALS Section.  An AALS Section would help emphasize the importance of consumer law in legal education, give us more of a reason to attend the annual meeting, and provide a place to meet every year, instead of every other year.  I think it's worthwhile to try, but I would be curious to hear from others. 

Negative Prepayments

By Alan White

That's what mortgage servicers call it when a loan is modified by adding fees and interest to the principal.  Based on reports to investors, I estimate that in September and October $288 million was added to homeowner mortgage balances as a result of modification deals.  While the popular perception of mortgage modifications is that some people are getting "bailed out" or at least getting a break on their loans, the reality is quite different.

In the October investor reports I reviewed, covering about half the subprime and alt-A market, 72% of modifications reported included a "negative prepayment", i.e. upped the loan balance.  The average negative prepayment for these folks was $11,200.  The average amount of debt forgiven for these homeowners?  $97.51. Meanwhile, on loans that were foreclosed and sold, the average loss was $121,000.  For ALL modified loans, the average write-off was $1,914.  Even for the small subset of modified mortgages that did not include any negative prepayment, i.e. the most generous mods, the average write-off was $6,588.

This is insanity.  Servicers (with a few notable exceptions) are preferring to foreclose at a $121,000 loss per loan rather than to forgive more than a few hundred dollars of any homeowner's debt.  While there is much wringing of hands about the fact that many homeowners get "modifications" and then fall behind again, is it any wonder?  We can't really evaluate the success or failure of mortgage modifications that reduce debt, because there have hardly been any yet. 

Ray Brescia on the Social Capital Response to the Subprime Mortgage Crisis

Ray Brescia of Albany has written "Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response," 56 Cleveland St. L. Rev. 271 (2008).  Here's the abstract:

This article explores the extent to which social capital theory can respond to the crisis in the subprime mortgage markets. Building on the groundbreaking theories of Robert Putnam in his book BOWLING ALONE: THE COLLAPSE AND REVIVAL OF AMERICAN COMMUNITY, this article seeks to explore the role of trust and social capital in micro-economic transactions, specifically those involving homeownership in general and the subprime mortgage crisis in particular. The article posits that asymmetries of information, the lack of fiduciary obligations between the mortgage broker and the subprime borrower, the incentives built into the subprime mortgage market as a result of mortgage securitization that promote abusive lending practices, deregulation that led to the influx of subprime mortgage products into communities of color, the limits of anti-discrimination laws to address this influx adequately, and restrictions on refinancing built into securitization agreements have all led to the current crisis. In response to these causes of the current crisis, this article suggests changes to the broker-borrower relationship, the promotion of greater consumer education and the creation of problem-solving courts to address the looming foreclosure crisis.

October 2008 NHTSA and CPSC Recalls

October 2008 vehicle recalls from the National Highway Traffic Safety Administration are here, and October 2008 product safety recalls from the Consumer Product Safety Commission are here.