LPS entered into a consent order (the “Order”) with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (collectively, the “banking agencies”) in connection with their review of matters relating to the mortgage servicing industry, including the services provided to mortgage servicers by their DocX and Default Solutions operations.
LPS will engage an independent third party to conduct a risk assessment and review of our default management businesses and the document execution services we provided to Servicers from January 1, 2008 through December 31, 2010.
Question: Wonder what the regulators thought of when they watched 60 Minutes broadcast of LPS, DOCX and Servicer fraud on national tv with over 12 million viewers?
Just see what the number one popular post has been on this site since the airing of it or do a simple google search like 60 Minutes Docx or 60 Minutes LPS and you’ll see SFF is the first site that comes up. We’re no fools and believe me the entire globe has tuned in, including the regulators.
The nation’s 14 largest mortgage firms must compensate wronged homeowners after federal bank regulators determined the companies broke federal and state laws by improperly foreclosing on an incalculable number of distressed borrowers. The agencies announced such penalties Wednesday, the first in what is likely to be a series of enforcement actions targeting the country’s biggest banks and costing them billions.
Lenders like Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial systematically broke rules and took shortcuts when foreclosing on homeowners last year, the regulators said. Their three-month review launched after documents and videos of so-called robo-signers — people who signed thousands of foreclosure documents a day without reading them or knowing what was in them — surfaced, leading the biggest banks to halt home seizures.
Bank examiners found the firms employed practices that “failed to conform to state legal requirements.” In other words, they broke the law.
The 14 largest U.S. mortgage servicers must pay back homeowners for losses from foreclosures or loans that were mishandled in the wake of the housing collapse, according to a consent decree released today.
The agreement between the servicers and U.S. regulators imposes more substantial penalties than early reports of the deal indicated. It could also help the U.S. Justice Department determine the size and scope of any future fines for the flawed practices, regulators said.
The banks didn’t admit or deny regulators’ findings, according to the orders.
From Fed Press Release:
The Federal Reserve will closely monitor progress at the firms in addressing these matters and will take additional enforcement actions as needed.
In addition to the actions against the banking organizations, the Federal Reserve on Wednesday announced formal enforcement actions against Lender Processing Services, Inc. (LPS), a domestic provider of default-management services and other services related to foreclosures, and against MERSCORP, Inc. (MERS), which provides services related to tracking and registering residential mortgage ownership and servicing, acts as mortgagee of record on behalf of lenders and servicers, and initiates foreclosure actions. These actions address significant compliance failures and unsafe and unsound practices at LPS and its subsidiaries, and at MERS and its subsidiary. The action requires LPS to address deficient practices related primarily to the document execution services that LPS, through its subsidiaries DocX, LLC, and LPS Default Solutions, Inc., provided to servicers in connection with foreclosures. MERS is required to address significant weaknesses in, among other things, oversight, management supervision, and corporate governance. The LPS action is being taken jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, while the MERS action is being taken jointly with those agencies and the Federal Housing Finance Agency.
The Federal Reserve Board based its enforcement actions on the findings of the interagency reviews of the major mortgage servicers, LPS, and MERS. A summary of the findings from the reviews of the mortgage servicers is available in the Interagency Review of Foreclosure Policies and Practices,which is simultaneously being released by the Federal Reserve Board and the other agencies.
The rule of law is not even worth 20 basis points. That’s the ultimate message in a recent paper by Charles Calomiris, Eric Higgins, and Joseph Mason evaluating the proposed AG mortgage servicing settlement. Calomiris et al. estimate that the settlement will raise mortgage costs at least 20bps, and they think that’s too much.
Recognize what they’re really saying: that 20-45bps is too high a price to pay for the rule of law. They value the rule of law at less than 20bps. At present conversion rates, that’s about 30 shekels of silver.
The whole Calomiris et al. document is rather strange, as it’s hard to do any serious evaluation of the settlement without knowing the terms. We’ve seen a proposed servicing standards term sheet from the AGs and we’ve seen a CFPB analysis of disgorgement of wrongful profits and the costs of potential principal reductions, but it’s way premature to attempt any sort of real evaluation of a settlement. Unless, of course, the goal is not a serious evaluation of a settlement, but an attempt to forestall a settlement. Which is what this paper is.
Federal banking regulators have not officially imposed their new rules for the top mortgage servicers, but criticism is already being heard. A wide coalition of consumer and housing groups is denouncing the legal agreements, which are likely to be published within a few days. ?
[…]
The problem, said Alys Cohen of the National Consumer Law Center, is the agreements “do not in any way require the servicers to stop avoidable foreclosures, and that is what we need.”
Reading between the lines of settlement proposals, the states attorneys general aren’t speaking the same language as the big banks. And struggling homeowners are paying the price.
By Abigail Field, contributor
FORTUNE — Over the past several months regulators have finally noticed what consumer attorneys have been saying for years: the big banks have routinely committed fraud in their foreclosure filings and their records of how much people owe are too often wrong. And the mortgage modification process, which was meant to help homeowners, has been exposed as an abject failure.
It’s going to get really interesting to see how this all plays out with the AG’s role.
According to the New York Times, the the servicers, which violated state and local laws and regulations governing foreclosures, are agreeing to improve their methods in numerous ways. They will be required to have more layers of oversight and proper training of their foreclosure staff. The oversight will extend to third party groups, including the law firms that do much of the actual work of eviction.
[…]
The investigators reviewed the policies and procedures, structure and staffing of the top servicers, as well as their use of law firms and other third parties. They examined 2,800 foreclosures in various stages.
The banks examined were Bank of America, Citibank, GMAC, JPMorgan Chase, Wells Fargo and nine others. The examination found critical deficiencies and shortcomings in foreclosure preparation and oversight, resulting in violations of state and local foreclosure laws, regulations and rules.
The servicers will probably be assessed fines at a later point.
Regulators including the Office of the Comptroller of the Currency, Federal Reserve and Office of Thrift Supervision could announce the agreements with the banks and thrifts as early as next week, though a date wasn’t final, according to people familiar with the matter.
The regulators are likely to act ahead of state attorneys general, who are also in talks with the banks. Those discussions are moving at a slower pace amid disputes among several state officials.
Seriously, why aren’t they all working together? Lefty doesn’t know what the right is doing.
O. Max Gardner III, a lawyer and expert on foreclosure cases handled in bankruptcy courts, said that the OCC must have used an unfairly narrow definition of a wrongful sale.
He said that in most of the hundreds of cases he has handled, banks misstated the amounts homeowners actually owed, failed to record or properly allocate mortgage payments, and tacked on thousands of dollars in unauthorized and excessive fees.
“We see a problem with the dollars and cents in almost every single bankruptcy case that I file,” Gardner said.
We give up…you dead beats really caught us this time. We can’t take any more punishment. You’re destroying our BONUSES!! We just want you ouuut…ouuut…OUT!
Us EMPERORS really don’t have any clothes.
Does any of this make sense? NO. Why don’t we just help you stay in your home? Why not give a principal reduction or anything else other but… like the price we would sell your home for at short sale?? Usually 50% or more of the amount owed.
According to secret spies (joke this has not been confirmed) rumor has it that the five largest US mortgage servicers were told this week at a confidential meeting with regulators to consider paying delinquent borrowers up to $21,000 each as part of a broader settlement of the foreclosure quandary.
The main regulator for the largest U.S. banks is preparing to break from state authorities and settle with lenders over their foreclosure practices, according to a source familiar with the process, dashing hopes for a comprehensive settlement
[SNIP]
The Office of the Comptroller of the Currency, impatient with infighting over the structure and shape of a coordinated settlement, is preparing to move on its own set of fines and business-practice fixes for banks, according to a source, who was not authorized to speak publicly.
The OCC’s settlement could come in the next couple weeks, the source said.
Bizarre is the first thing that comes to mind. What many of us find disturbing is what exactly is playing part behind closed doors. The following information should have been in place years ago…
The document also spells out steps for banks to verify the accuracy of amounts owed, people familiar with the proposal said. Banks will face limits on fees that they can impose on delinquent borrowers. The document also includes a list of directives to improve tracking of mortgage notes and the chain of title, and to boost oversight of foreclosure law firms and third-party vendors, these people said.
The code of conduct references the Mortgage Electronic Registration System, or MERS, an electronic lien-registry system designed to facilitate the recording of mortgages. It says details clarifying the use of MERS may be spelled out later.
Banks said they are studying the document. “We are analyzing what was shared with us yesterday,” said a spokeswoman for Wells Fargo. A spokesman for Citigroup said, “Our discussions with government officials are confidential.” Bank of America declined to comment.
Negotiating fraud should not be an option.Why keep this information from the public?
Art Levine
Contributing editor of The Washington Monthly
Posted: March 3, 2011 08:21 PM
Led by Iowa Attorney General Tom Miller, who has apparently abandoned promises to put bank officials in jail, dozens of state officials from around the country are meeting in Washington next week to finalize a multibillion-dollar settlement with bank executives for allegedly widespread mortgage and foreclosure abuses. But with two million homeowners already evicted and five million more facing foreclosure this year, advocacy and policy groups, including BanksterUSA and the National People’s Action network, are stepping up pressure for a settlement that imposes stiff sanctions, criminal penalties and forces banks to renegotiate mortgages—and helps financially those who were alreadly illegally forced from their homes.
But there are mounting signs of disputes among federal oversight agencies over the scope of any punishment and fines for bank officials, and that’s considered an ominous sign by critics of a likely weakening of the ongoing state attorneys-general settlement talks with the banks. As George Groehl, the executive director of National People’s Action told The Huffington Post: “There’s no reason to go to all this trouble and not take that final step. It’s mind-boggling for them to be considering letting all these guys off the hook.”
The inter-regulator fight over the proper parameters of a foreclosure fraud settlement are really highlighting the changes in the financial regulatory world. What we’re told is that the OCC and Fed are urging a weak settlement, while FDIC, the state AGs, and the Consumer Financial Protection Bureau (CFPB) are pushing for a serious settlement.
Parts of this line up look quite familiar, but parts are new and exciting.
There’s nothing new or surprising about the OCC protecting (rather than regulating) the banks. Similarly, it’s not surprising to see the Fed back the banks, although, the Fed tends to be less gung-ho than OCC in these matters (and I would note that there isn’t necessarily unanimity within any agency on these issues). It’s also no surprise to see the state AGs on the other side, pushing for regulation. Gosh, this just sounds like a Wachovia v. Watters redeux (one of OCC’s most shameful moments in recent years—putting its preemption agenda ahead of consumer protection in the mortgage space. Now where did that get us?)
HSBC North America Holdings, the nation’s ninth-largest bank by assets, warned investors Monday of impending fines after receiving notice from federal bank regulators admonishing the lender for improper foreclosure practices.
The bank is the latest in a string of large financial companies that have used recent securities filings to prep investors for fines and a significant increase in costs associated with processing mortgages and repossessing homes, after being cited by regulators for deficient and sometimes illegal operations. On Friday, Ally Financial, Wells Fargo & Co., and SunTrust Banks — three of the nation’s 10 largest handlers of home mortgages — said in regulatory documents that they expect to be sanctioned by the U.S. government for their foreclosure practices.
The penalties follow months-long criminal and civil probes by federal and state regulators into lenders’ mortgage practices. Officials said they found significant shortcomings and violations of various state laws. A “small number” of foreclosures should not have occurred, John Walsh, the interim head of the Office of the Comptroller of the Currency, the federal regulator of national banks, told a Senate committee earlier this month after his agency surveyed less than 3,000 out of millions of loan files.
Congresswoman Waters Troubled by Reported Foreclosure Fraud Deal
Reiterates Need for Servicing Standards, Raises Concerns about Settlement Figure & OCC Protecting Banks Over Borrowers
Washington, Feb 25 –
Congresswoman Maxine Waters (D-Calif.), a senior member of the Financial Services Committee, issued the following statement today after reports of a deal between the Obama Administration and mortgage servicers to settle systemic fraud issues in the servicing and foreclosure industry:
Reporting from yesterday and today indicates that federal regulators are close to reaching a settlement over what they describe as “shortcomings in foreclosure governance and document preparation processes,” or what I have plainly referred to as “foreclosure fraud.” The settlement, as described by the Wall Street Journal, Huffington Post, and other media outlets, leaves me deeply concerned about whether homeowners will receive the due process and fair treatment they deserve.
Particularly, I am concerned about the $20 billion settlement figure, spread across 14 servicers, that has been noted in various reports. Though this figure sounds like a large settlement to those unfamiliar with the scale of the foreclosure crisis, we must remember that over 3 million homes have been lost to foreclosure since 2006, and some analysts expect an additional 11 million foreclosure filings in the near future. Moreover, the Center for Responsible Lending estimates that foreclosures between 2009 and 2012 will result in $1.86 trillion in lost wealth for families.
We must also contrast this $20 billion settlement figure, shared by 14 servicers, with the $8.6 billion settlement paid by Countrywide Finance Corp. in 2008 as a result of origination fraud. I have every reason to believe that today’s improper servicing is likely just as pervasive as origination fraud a few years ago.
This settlement is too small, and will likely have one of two results: either borrowers will receive insignificant principal reductions, or reductions will only be available to a small subset of troubled borrowers.
I am also concerned about the fact that this settlement, as reported, contains no discussion of mortgage servicing standards going forward. Though I was pleased that the Administration briefly mentioned the need for servicing changes in their Fannie Mae and Freddie Mac reform proposal, we have yet to see the details of their plan for servicing reform. As I have reiterated for years, meaningful servicing standards are absolutely necessary to protect the millions of borrowers vulnerable to foreclosure. My bill from the last Congress, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2009 (H.R. 3451), which I plan to reintroduce, contained borrower protections that I believe could have prevented many of the servicing failures we see today. I urge regulators to insist on meaningful borrower protections that satisfy all of the servicing reforms described below:
• Provide that servicers have a duty to engage in reasonable loss mitigation activities, as outlined in H.R. 3451;
• Adopt servicer compensation structures that result in servicers having an interest as to whether the loan remains current, and separates simple transaction processing from actual loss mitigation activities;
• Require that a formula govern how second lien holders are required to modify second liens in the event of a first lien modification;
• Mandate that servicers establish a single-point-of-contact for each borrower seeking a loan modification, and provide that single-point-of-contact with actual decision making authority;
• Require that an independent master servicer provide oversight and resolve disputes regarding servicers’ actions;
• End the foreclosure “dual track,” which often results in borrowers being foreclosed upon by one division of a servicer while they are simultaneously attempting to negotiate a loan modification with another division of the servicer;
• Require servicers to foreclose in their own names;
• Change payment structures for law firms and other servicer contractors so that compensation is not tied to the speed at which these contractors foreclose; and
• Require servicers to disclose the complete chain of title as well as a full accounting of all fees (both upon request and in the Notice of Default), and the use of lost note affidavits in their foreclosures.
In addition to these borrower protections and servicing industry reforms, I continue to believe that it is essential for Congress to provide bankruptcy judges with the authority to alter mortgage debt on primary residences, an ability that judges already have on vacation homes. I also believe that the Treasury Department should pursue monetary penalties for servicers’ failure to comply with Home Affordable Modification Program (HAMP) guidelines. These monetary penalties could be redirected for any number of purposes, including increasing legal services funding so that homeowners can be adequately represented by counsel in foreclosure. Finally, if the interagency report on foreclosure fraud does not already address this issue, I would urge regulators to conduct a robust investigation into whether parties involved in mortgage securitization may have failed to follow rules regarding the creation of Real Estate Mortgage Investment Conduits (REMICs), and are therefore in violation of tax rules.
More generally, I remain concerned that our regulators didn’t learn the lessons outlined in the Financial Crisis Inquiry Commission report, which starkly laid out how a failure to protect borrowers led to an explosion in exploitive subprime mortgage products. All the evidence we have points to the fact that history is likely repeating itself. In fact, in a November hearing of my Subcommittee, regulators made it clear that they learned of foreclosure fraud via newspaper reports, despite having teams of examiners located within the operations of major servicers.
For this reason, I was very skeptical from the outset that this investigation would yield substantive results, given that it was led by the Office of the Comptroller of the Currency (OCC). As the subprime crisis has taught us, a regulator charged with protecting banks’ safety and soundness cannot also be charged with protecting the due process rights of borrowers.
Through yesterday and today’s reporting, we learned that the OCC’s position is that only a “small number” of borrowers were improperly foreclosed upon. I am doubtful of this claim, given what I’ve learned about servicer-driven defaults in the years since this crisis began. For instance, National Consumer Law Center attorney Diane Thompson has noted in testimony that around 50 percent of the borrowers she represents in foreclosure cases were subject to a servicer-driven default. Academic work from experts like Kurt Eggert at Chapman University School of Law provides additional support for claims of servicer misbehavior. And just recently, JPMorgan Chase admitted to wrongfully foreclosing on 14 active duty military personnel and overcharging another 4,000 military borrowers on their mortgages, in contravention of the Servicemembers Civil Relief Act.
To date, all we have are these anecdotal reports. But through both Congressional hearings, and first-hand experience with servicers, I believe that there is substantial evidence indicating that improper fees, wrongful application of borrower payments, the use of unscrupulous foreclosure mills and other practices evidence the fact that improper foreclosures are widespread.
I eagerly await the full results of the interagency foreclosure fraud investigation. In the meantime, I will continue to advocate for servicing reforms. I believe that these fundamental changes to mortgage servicing are needed not only for borrowers, but to ensure a fully-functioning mortgage market that protects investors and encourages the return of private capital moving forward.
TESTIMONY OF
JOHN WALSH
ACTING COMPTROLLER OF THE CURRENCY
before the
SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY
of the
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
November 18, 2010
Statement
Introduction
Chairwoman Waters, Ranking Member Capito, and members of the Subcommittee, I appreciate this opportunity to discuss recently reported improprieties in the foreclosure processes used by several large mortgage servicers and actions that the Office of the Comptroller of the Currency (OCC) is taking to address these issues where they involve national banks. The occurrences of improperly executed documents and attestations raise concerns about the overall integrity of the foreclosure process and whether foreclosures may be inappropriately taking homes from their owners. These are serious matters that warrant the thorough investigation that is now underway by the OCC, other federal bank regulators, and other agencies.
<SNIP>
A key objective of theMERS examination is to assess MERS corporate governance, control systems,
and accuracy and timeliness of information maintained in the MERS system. Examiners assigned to MERS
will also visit on-site foreclosure examinations in process at the largest mortgage servicers to
determine how servicers are fulfilling their roles and responsibilities relative to MERS.
We are also participating in an examination being led by the FRB of Lender
Processing Services, Inc., which provides third-party foreclosure services to banks.
We expect to have most of our on-site examination work completed by mid to late
December. We then plan to aggregate and analyze the data and information from each of
these examinations to determine whether or what additional supervisory and regulatory
actions may be needed. We are targeting to have our analysis completed by the end of
January.
We recognize that the problems associated with foreclosure processes and
documentation have raised broader questions about the potential effect on the mortgage
market in general and the financial impact on individual institutions that may result from
litigation or other actions by borrowers and investors.
US Regulators Examining Two Mortgage Processing Firms
By Alan Zibel, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Federal bank regulators are conducting examinations of two companies that banks use to process foreclosures, amid concerns that banks cut corners on thousands of foreclosure documents, Acting Comptroller of the Currency John Walsh said Wednesday.
Walsh, in remarks prepared for delivery Thursday, said his agency is examining Reston, Va.-based Mortgage Electronic Registration Systems in conjunction with the Federal Reserve, the Federal Deposit Insurance Corp. and the Federal Housing Finance Agency.
That company, known as MERS, lets lenders package and sell mortgages without recording each transaction with county property offices.
It has come under fire from critics, who say MERS doesn’t have the right to act as the legal representative of the mortgage owner in foreclosure cases.
AMERICA’S SERVICING COMPANY
LENDER PROCESSING SERVICES
WELLS FARGO BANK, N.A.
Action Date: October 7, 2010
Location: Palm Beach County, FL
WHY WELLS FARGO MUST BE ORDERED TO STOP ITS FORECLOSURES. While other banks have acknowledged some problems and halted some foreclosures, Wells Fargo has issued self-serving statements and forged ahead.
Why should Wells Fargo be ordered to stop its foreclosures? First, Wells Fargo’s foreclosure mill, America’s Servicing Company, and its robo-signers John Herman Kennerty, China Brown, Heather Carrico, Natasha Clark and others signed thousands of documents each month with no knowledge of the truth of the matters set forth for the courts in those documents. The sheer volume of the documents signed by Kennerty should be enough to convince any court that Kennerty had no knowledge of the facts.
A court in Brooklyn found a case where Kennerty’s signature was notarized, but actually did not appear on the document. The notary was mindlessly signing a stack of documents.
Which law firms are submitting the Affidavits in Florida for Wells Fargo? Florida Default Law Group and the Law Offices of David Stern, two of the law firms under investigation by the Florida Attorney General. Second, Wells Fargo used Docx in Alpharetta, Georgia to produce mortgage assignments used in thousands of Wells Fargo foreclosures. Many different employees signed the name “Linda Green” on these documents. (For three examples of mortgage assignments used by Wells Fargo, click on the “Pleadings” section of this website – no sign-on is necessary.)
Despite the statements of Lender Processing Services to the contrary, Docx “Linda Green” Affidavits – with many versions of the Linda Green signature – continued to appear in Wells Fargo cases well into 2009. Examples are also in the Pleadings Section. The Perry Affidavit was signed July 10, 2008, but notarized January 15, 2009. The Carrerra Affidavit was signed in January 2008, but notarized in January, 2009. On these few examples, Linda Green is identified as the Vice President of Wells Fargo bank, the Vice President of Sand Canyon Mortgage and the Vice President of American Home Mortgage Servicing. Most are notarized by the same notary, Brittany Snow, who says she has personal knowledge that Linda Green is Vice President of these many entities.
In the first quarter of 2010, Wells Fargo filed 1,117 foreclosure actions in Palm Beach County. In the second quarter, Wells Fargo filed 920 foreclosures in Palm Beach County. In the third quarter, Wells Fargo filed 847 foreclosures. In the vast majority of these foreclosures, Wells Fargo is acting as a trustee for a mortgage-backed securitized trust that cannot even prove that it acquired the mortgages without relying on the Linda Green and John Kennerty documents.
This is not the time to stonewall. THE FDIC AND OCC, THE SECRETARY OF THE TREASURY AND THE SECRETARY OF HOUSING NEED TO STOP THE WELLS FARGO FORECLOSURES.
“If the people cannot trust their government to do the job for which it exists
– to protect them and to promote their common welfare – all else is lost.”
– BARACK OBAMA, speech, Aug. 28, 2006
Economics Editor, AlterNet; Fellow, Campaign for America’s Future
Posted: September 12, 2010 02:52 PM
The Washington Post has published a very silly op-ed by Chrystia Freeland accusing President Barack Obama of unfairly “demonizing” Wall Street. Freeland wants to see Obama tone down his rhetoric and play nice with executives in pursuit of a harmonious economic recovery. The trouble is, Obama hasn’t actually deployed harsh words against Wall Street. What’s more, in order to avoid being characterized as “anti-business,” the Obama administration has refused to mete out serious punishment for outright financial fraud. Complaining about nouns and adjectives is a little ridiculous when handcuffs and prison sentences are in order.
Freeland is a long-time business editor at Reuters and the Financial Times, and the story she spins about the financial crisis comes across as very reasonable. It’s also completely inaccurate. Here’s the key line:
“Stricter regulation of financial services is necessary not because American bankers were bad, but because the rules governing them were.”
Bank regulations were lousy, of course. But Wall Street spent decades lobbying hard for those rules, and screamed bloody murder when Obama had the audacity to tweak them. More importantly, the financial crisis was not only the result of bad rules. It was the result of bad rules and rampant, straightforward fraud, something a seasoned business editor like Freeland ought to know. Seeking economic harmony with criminals seems like a pretty poor foundation for an economic recovery.
The FBI was warning about an “epidemic” of mortgage fraud as early as 2004. Mortgage fraud is typically perpetrated by lenders, not borrowers — 80 percent of the time, according to the FBI. Banks made a lot of quick bucks over the past decade by illegally conning borrowers. Then bankers who knew these loans were fraudulent still packaged them into securities and sold them to investors without disclosing that fraud. They lied to their own shareholders about how many bad loans were on their books, and lied to them about the bonuses that were derived from the entire scheme. When you do these things, you are stealing lots of money from innocent people, and you are, in fact, behaving badly (to put it mildly).
The fraud allegations that have emerged over the past year are not restricted to a few bad apples at shady companies– they involve some of the largest players in global finance. Washington Mutual executives knew their company was issuing fraudulent loans, and securitized them anyway without stopping the influx of fraud in the lending pipeline. Wachovia is settling charges that it illegally laundered $380 billion in drug money in order to maintain access to liquidity. Barclays is accused of illegally laundering money from Iran, Sudan and other nations, jumping through elaborate technical hoops to conceal the source of their funds. Goldman Sachs set up its own clients to fail and bragged about their “shitty deals.” Citibank executives deceived their shareholders about the extent of their subprime mortgage holdings. Bank of America executives concealed heavy losses from the Merrill Lynch merger, and then lied to their shareholders about the massive bonuses they were paying out. IndyMac Bank and at least five other banks cooked their books by backdating capital injections.
There are numerous complaints from conservatives, political and economic, as to the continuation of the federal GSEs and guarantee programs that dominate the market place. These matters now are coming to the forefront of Congressional consideration in the wake of passage of FINREG. The bifurcated approach was practically driven: one bite was too much to swallow, and the methods of solution are dramatically different.
FINREG has been described as a broad general outline for actions yet to be taken by as many as 16 federal agencies through rule-making processes. One of the most potentially significant pieces of this regulatory maze is supposed to be the Consumer Protection Agency tucked away in Federal Reserve. The rule-making process will be long and tortured. Agency lawyers basically offer up drafts for comment by the public. The “public” translates into “special interests”. These are generally consumer protection groups, or industry groups. Legions of industry specialized lawyer-lobbyists comment in technical terms that are incomprehensible to 99% of the lawyers in the country. The complexity tends to make it an insider ball game. Industry lawyer-lobbyists that worked the bills know where the choke points are—where the skeletons are hidden. Consumer advocates are few and far between—generally outgunned– certainly underpaid in comparison to the well-financed industry groups. Disinformation is industry’s stock in trade. Confusion is its currency. By the end of the process even the most well-meaning regulators are overwhelmed. What to believe? Who to believe? Much like the judiciary, the rule-makers receive comments from the industry side, and wait to hear the consumer rebuttals. If the rebuttals are poorly framed, the consumer comments are placed in the shadows. Even when the most aggressive rule-making process generates in a proposed rule, the rule-regulation may be held in suspense for decades. The existing agencies will be best able to engage in rule-making quickly. No doubt industry-originated drafts are already circulating in at least some instances.
For an entirely new rule-making authority, it may take a year or more simply to find the writers, employ them, then map a strategy and initiate the formal rule-making process. Years pass—other agencies with a head start fill the void. Conflicting rules are inevitable—the new agency may be consumed initially simply by attempting to stake out its jurisdiction by submitting comments to other agencies rule-making either directly in the public record or through back-room confrontations. What is the effect?
Generally, regulations emerging from a rule-making procedure are either or “interpretative” or “legislative” rules. Interpretative regulations cite to various legislative provisions to clarify already reasonably definitive statutory mandates. The interpretative rules are promulgated by the agency charged with jurisdiction over the subject matter. The responsible agency writes rules to clarify broader statutory language, or conflicting statutory language. Sometimes this type of rule-making will parrot statutory language in order to provide the agency with a statement of internal policy upon which specific case determinations may be based. These latter agency decisions may be referred to as rulings but more correctly are described in administrative law as “orders”. The agency that promulgates interpretative regulations is bound by and must follow those regulations in its individual case decisions/orders. Interpretative regulations may be applied retroactively in the reasonable discretion of the agency. The retroactive application is often challenged by industry members subject to orders based on the regulation. Generally the industry will argue that the interpretation conflicted with underlying statutory intent as reflected by committee reports, floor speeches by sponsors etc. The industry may also argue that the orders pursuant to interpretative regulations may not issue for retroactive application in event that they conflict with long-standing administrative practice by that agency, and may even go so far as to state that the longstanding practice was implicitly incorporated by statute even if not specifically referenced. The theory is that the legislature is all-knowing, and adopts administrative rules implicitly when legislating in that area because the legislature would have specifically altered the treatment if it had so intended. These fears tend to make retroactive application difficult and contentious.
A legislative body may also authorize legislative rule-making. Generally, this will be done by language such as the “agency shallwrite rules to implement the purposes” of the general legislative mandate. Other times, there will be a more ambiguous direction: “this section shall be effective upon adoption of regulations”. In the latter case, the agency is basically vested with authority to decide for itself if and when it needs the rules to be created and applied. Agency discretion in the context of legislative rule-making is tantamount to a punt by Congress to the agency of matters too complex for legislation. These matters are supposedly within the special expertise of the agency and its word is law virtually equivalent to Congress’. Legislative regulations are drafted by persons appointed or supervised by the then-current Administration.
The regulatory path generally follows the following course: Congress passes a statute with Committee Reports. The agency determines the priority of required or permitted action. The Agency publishes intent to engage in rule-making in a described area. Sometimes this is described as “Advance Notice of proposed Rule-Making” or ANPRM. Sometimes it is simply notice of Proposed Rule-Making. In any event, the notice generally constitutes the beginning of agency hearings and/or opening of a comment period during which the agency is accessible to introduction of information, supposedly on the record.
The agency takes comments, hears testimony and investigates facts. It makes determinations of fact and law and writes regulations accordingly. The agency will typically publish “proposed rules” incorporating and addressing the comments made during the open hearing process. The notice of associated with published proposed rules should invite further comment—but on a more limited basis. The proposed rules may stand in place for years, while under attack from all sides. Eventually—as much as 20 years later—the proposed rules tested by time may become “final”.
What does this mean to the community of mortgagors—subjects of predatory loans and predatory collection practices?
To bring it home dramatically to relate to current discussions, the decision by Bankruptcy Court Judge Federman, in B.R. Western District Missouri Case # 10-20086; In re: Box stated at page 8, “The fact that the February 18, 2010 assignment [typical MERS as nominee of a bankrupt originator] was made after the bankruptcy case was filed does not render it per se invalid in that there is no rule prohibiting a creditor from assigning its claim postpetition.” [Emphasis Added]. This has implications with respect to tracking custody, obtaining discovery, simply unraveling the transactions. It touches upon the after-acquired note issues, and generally invites frauders and their successors to carry on in good stead.
In another hot recent case, Cleveland vs Ameriquest et al, U.S.C.A. 6th Cir. No. 09-3608, the Court responded to Clevelands’ assertions of injury by underwriters that “began to direct lenders on the types of loans to meet the [underwriters’] securitization needs….and turned a blind eye even when the loans made no economic sense.” The District Court below had decided that the city had no claim that the defendants had abetted a nuisance, ”because subprime lending…is legal”. Interestingly, the facts pled suggested that the city asserted not just subprime, but predatory, subprime lending. References to official sources bear out this connection between predatory and un-economic loans. Quoting from a well-done brief on the topic;
“Specifically, in the matter of Associates Home Equity Services v. Troup, 343 N.J.Super. 254, 267 (App. Div. 2001) the Appellate Division opined:
Predatory lending as been described as: a mismatch between the needs and capacity of the borrower… In essence, the loan does not fit the borrower, either because the borrower’s underlying needs for the loan are not being met or the terms of the loan are so disadvantageous to that particular borrower that there is little likelihood that the borrower has the capacity to repay the loan. (citations omitted).
This definition set forth by the Appellate Division is entirely consistent with Federal guidance on the topic. Specifically, by “Advisory Letter” AL 2003-2 from the Office of the Comptroller of the Currency (“OCC”) to the Chief Executive Officers of All National Banks…, the OCC stated:
The terms “abusive lending” or “predatory lending” are most frequently defined by reference to a variety of lending practices. Although it is generally necessary to consider the totality of the circumstances to assess whether a loan is predatory, a fundamental characteristic of predatory lending is the aggressive marketing of credit to prospective borrowers who simply cannot afford the credit on the terms being offered. Typically, such credit is underwritten predominantly on the basis of the liquidation value of the collateral, without regard to the borrower’s ability to service and repay the loan according to its terms absent resort to that collateral. (emphasis provided).
Furthermore, Section 39 of the Federal Deposit Insurance Act generally requires Federally Chartered banks to establish “safety and soundness” standards for underwriting loans. At 12 C.F.R. Part 30—Appendix A, “Interagency Guidelines Establishing Standards for Safety and Soundness,” the various federal agencies who regulate banking institutions were directed to consider a number of factors in implementing loan underwriting guidelines.
At subpart “C.” lenders are directed to “…establish and maintain loan documentation practices that:
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2. Identify the purpose of a loan and the source of repayment, and assess the ability of a borrower to repay the indebtedness in a timely manner.
At subpart “D” lending institutions are directed to “establish and maintain prudent credit underwriting practices that:
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3. Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed.’”
So the question now is whether the City of Cleveland failed to properly assert that subprime predatory lending was the subject of the complaint—or the Court has ruled that “predatory lending” is legal?
Much if not most of the mortgage crisis arose as a result of predatory lending on steroids. The reasons were varied: 1) to generate fees all around by refinancing loans and originating new ones, 2) to obtain products to sell to investors as a steep markup—more fees/profits and last but not to be over-looked in respect of predatory loans, the servicer is entitled to hold the proceeds of foreclosure until the tranche MBS are “called” bought out and the trust is closed—or investor payout as prescribed in the MBS themselves whichever comes 1st. the main driver for “designed to fail” or predatory loans was the probability that the loans would default and the originator’s servicing rights’ foreclosure pool would grow as the foreclosures went on according to plan.
Now clearly the above 2 issues among many are critical to the continuation or termination of the practices which have crushed the entire home-owning population of America, along with the economy, the future of our children, and destroyed the prospect of comfortable retirements for even the most diligent workers. The length and breadth of the damages from this obscene—but not illegal?—behavior is without parallel.
The last hope for correction in the future if not the past is the orderly and honest establishment of a keen regulatory system that directly addresses these and related issues. This will occur in Agency hearing rooms, in Comments and testimony before the agency staffs. A coordinated effort by advocates is necessary to identify cases of abuse, why they happened and what would prevent the same thing occurring again.
If I have misstated, understated or need to identify further stark examples of judicial distress due to confusion of the law, please post your suggestions. We need to identify corrections before the industry glosses over them. Do not play defense—play offense.
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