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Friday, January 6th, 2012

Without Bankruptcy Option, Are Student Loans Predatory?

A recent article on Forbes.com lashes out against the state of student lending and student debt in the United States. The author makes several salient points regarding the problems surrounding student debt, which cripples many graduates largely because it is very difficult to discharge in bankruptcy.

But what makes a loan “predatory?” The nation conspicuously lacks a legal or official definition for “predatory lending,” but the Forbes article cites many attributes of student loans that suggest they might fall into this category. These include:

  • Student loans do not come with “free-market consumer protections.” Student loans cannot easily be discharged in bankruptcy (compared to other unsecured loans); borrowers do not have the option to restructure their student loans; and these loans come with no real statute of limitations in most cases. Lacking these protections, borrowers are more or less bound for life to repay any money they borrow for their education.
  • The organizations that are meant to oversee student lenders (called “guarantors”) make roughly 60 percent of their revenue from fees and penalties associated with loans that have gone into default. In other words, the groups intended to protect borrowers from lender abuse actually have a financial interest in borrowers not being able to repay their loans as outlined in their loan terms.
  • Student lenders have broader debt collection rights than other types of lenders. This means that they have a better chance of collecting some or all of the money owed to them (including money owed as part of penalties and fees).

Comparing Other Types of Predatory Loans to Student Loans

To refresh your memory about problematic predatory lending that has made headlines in recent months and years in the U.S., here’s a quick outline of how two different types of predatory loans were outed and then blasted by pretty much every consumer advocate in the country.

  • Subprime mortgages: These fueled the housing bubble (and bust), and essentially amounted to lending money to people who had no real chance of repaying it. One of the hallmarks of many subprime mortgages issued was that those in the lending, loan servicing, and investment fields had financial incentives for the loans to fail. In other words, these people stood to make money when borrowers defaulted on their loans, because of late fees and other penalties (sound familiar?).
  • Payday loans: The target of several pieces of legislation in recent years, payday loans are profitable to the lenders exactly because borrowers are not expected to be able to repay them as originally agreed. Payday loans become most lucrative when borrowers must pay late fees and penalties—meaning, of course, that they were designed to extend money to those who did not have a good chance of repaying it.

Congress has made some noise about reforming the student loan industry, but as of now, no real, meaningful changes have been implemented.

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Monday, November 14th, 2011

Homeowners’ Foreclosures Could Be up for Review

Federal bank regulators from the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision have announced a measure that might mean compensation for millions of families who have lost homes to foreclosure.

According to an announcement released in early November, a newly instituted program will allow certain homeowners to collect compensation for mistakes their loan servicers made during the foreclosure process. Specifically:

  • Qualified homeowners will be mailed letters about their eligibility to participate. Homeowners should expect to receive their letter by the end of the year; those who wish to find out if they are qualified can visit the website IndependentForeclosureRview.com.
  • To be eligible, a mortgage must have been handled by one of the mortgage servicers participating in the program.
  • To determine whether mistakes were made in the processing of your foreclosure, you must apply for an independent review of your mortgage and foreclosure documents. Your application must be sent in by the end of April 2012.
  • If the reviewer finds that there were mistakes in your foreclosure or mortgage documents, you may be eligible to collect compensation.

Some analysts estimate that as many as four million homeowners might be affected and eligible for compensation.

Problems in Mortgage Documents

This announcement is not the first to highlight the problems that plagued the mortgage market during the housing boom whose collapse led to the Great Recession. In addition to the robo-signing scandal and several lawsuits against mortgage servicing company MERS, lawyers and judges have found many individual foreclosure cases that did not hold up to scrutiny.

This latest iteration of the problematic foreclosure theme highlights just how troubled all components of the U.S. housing market really are.

Sources note that mistakes or misrepresentations in foreclosure or mortgage documents that could make a homeowner eligible for compensation might include the following:

  • Fees that were unwarranted or calculated incorrectly;
  • Foreclosures that were carried out while the homeowner was protected by bankruptcy’s automatic stay; and
  • Foreclosures carried out while the homeowner was in talks with a lender about the possibility of a mortgage modification.

Who’s Paying for All This?

The independent review firms will be compensated by the mortgage loan servicers targeted by the federal investigation. As part of the terms laid out in the investigation’s findings, regulators required those mortgage servicers to hire review agencies unrelated to them to conduct the review of mortgage documents.

In other words, homeowners who apply to have their mortgages reviewed will not be responsible for paying the fees associated with the independent review process.

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Friday, September 30th, 2011

FTC Halts Fraudulent Mortgage, Debt Relief Scammer

The Federal Trade Commission filed a complaint with U.S. District Court alleging that Christopher Mallett has engaged in deceptive practices online, targeting debt-ridden consumers. The complaint outlines Mallett’s alleged misdeeds, which include violations of the Federal Trade Commission Act.

According to the FTC, Mallett:

  • Impersonated federal consumer protection agencies on multiple websites.
  • Falsely claimed that he and his websites were affiliated with federal consumer protection agencies.
  • Invented a consumer protection agency that does not actually exist (the Department of Consumer Services Protection Commission).

The FTC claims that Mallett attempted to attract debt-ridden consumers to his site and redirect them to affiliate sites that provided relief for mortgages, debts, and taxes. None of these sites had any actual affiliation with the federal government, and all reportedly charged customers for their services.

If proven, these actions would violate the Telemarketing Sales Rule and the Mortgage Assistance Relief Services Rule, which outline how online services and mortgage assistance can be advertised and sold.

Plagiarism of FTC Words & Symbols

In addition to Mallett’s alleged fraudulent affiliation claims, the FTC charges that he improperly used the FTC’s official seal and closely copied language from the FTC’s web site on his own web pages. Mallett’s companies and web sites reportedly include:

  • U.S. Debt Care
  • World Law Debt
  • U.S. Mortgage Relief Counsel
  • gov-usdebtreform.net
  • worldlawdebt.org
  • FHA-homeloan.info

Because of the close matches between official government logos and language and that on Mallett’s sites, he may also face charges of impersonating government agencies.

Unsubstantiated Debt Settlement Claims

In addition to his false claims of government affiliation, Mallett reportedly made unsubstantiated claims about how his services could benefit consumers. The FTC notes that Mallett promised substantial reduction in consumer debts, even going so far as to publish charts showing previous customers’ “success” in lowering their debts.

Mortgage & Debt Relief Scams

The FTC is bringing the complaint as part of its efforts to eliminate scams that prey on consumers who are struggling with mortgage-related debt and other types of consumer debt. These types of scams can be particularly malicious because unsuspecting consumers may spend money they can barely afford for what they believe is a service that will help them turn their finances around.

When they learn that the service was nothing more than a scam, they often suffer a double blow of having lost money and having lost a chance at getting significant help toward improving their financial situation.

In some cases, consumers turn to such services to avoid filing for bankruptcy; ironically, spending money on such scams may push these consumers over the edge financially, leaving them with few choices besides personal bankruptcy.

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Tuesday, September 13th, 2011

FTC Shuts Down Illegal Payday Lender Wage Garnishment

The Federal Trade commission reported this week that it has halted a payday lender from attempting to garnish consumers’ wages without the necessary court order. The company, Payday Financial, LLC, reportedly did business under the names Big Sky Cash and Lakota Cash.

Sources note that, in order to garnish its customers’ wages, Payday Financial divulged information about alleged payday loan debts to their employers, which is illegal. The attempt to garnish wages also prevented customers from disputing the debts in court or working out a payment plan with the lender.

Wage Garnishment Rules

Federal law permits government entities to request wage garnishment for unpaid debts owed to the government; however, the law requires that private creditors (i.e. anyone other than the government) go through the court system if they want to pursue wage garnishment.

According to the FTC, Payday Financial sent customers’ employers paperwork designed to look like documents from the federal government requesting wage garnishment to repay debts. That move has led the FTC to charge Payday Financial with:

  • Misrepresenting their legal wage garnishment status to employers (in other words, lying about their legal ability to garnish the employees’ wages);
  • Lying about their communication with consumers (specifically, by indicating that they had already given the employees an opportunity to contest or pay the debt);
  • Illegally revealing the existence and amount of alleged debts without consumers’ consent or knowledge;
  • Violating the FTC’s Credit Practices Rule, which does not permit lenders to require that consumers consent to wage garnishment in the event of default; and
  • Violating the Electronic Funds Transfer Act, which prohibits payday lenders from requiring borrowers to authorize direct debit payment of loans.

Payday Financial has agreed to stop garnishing its customers’ wages until a court decides on the case.

Halting Wage Garnishment through Bankruptcy

Consumers who are dealing with legal wage garnishment have the option of filing for bankruptcy to prevent further withdrawal of funds from their wages. Personal bankruptcy includes a legal protection called the automatic stay, which prevents collection actions of all kinds for the duration of the bankruptcy case.

The automatic stay can halt:

  • Wage garnishment;
  • Debt lawsuits;
  • Foreclosure;
  • Repossession; and
  • Phone calls and mailings from creditors.

In bankruptcy, filers may have debts discharged or enter a repayment plan to catch up on past-due debts. Once a debt has been discharged or repaid in part through the bankruptcy court, creditors no longer have a legal right to collect on it (meaning they can no longer legally garnish wages to cover that debt).

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Wednesday, September 7th, 2011

Federal Government Sues Major American Banks over Mortgage-Backed Securities

On September 2, the Federal Housing and Finance Authority (FHFA) sued 17 companies over sales of toxic mortgage-backed securities to Fannie Mae and Freddie Mac. Among those named in the suit were many of the country’s largest banks, including Bank of America, JP Morgan Chase, CitiGroup, and Morgan Stanley.

The suit does not currently request a specific amount of money in damages, but according to the Associated Press, Fannie and Freddie bought $196 billion worth of toxic securities during the housing boom. Here’s a closer look at the suit and what might happen.

FHFA: Financial Firms Broke State & Federal Laws

One of the suit’s allegations is that the financial firms violated federal and state laws by selling the securities to Fannie Mae and Freddie Mac, two government-sponsored companies that help make mortgages more affordable to Americans. Specifically, the lawsuit claims that the banks and other lenders:

  • Sold mortgage-backed securities that had “materially false or misleading” statements and omissions of critical information;
  • Falsely indicated that the mortgages met legal underwriting guidelines and were all thoroughly reviewed; and
  • Substantially overstated borrowers’ ability to make mortgage payments on their loans.

At its core, the lawsuit claims that the 17 sellers lied to Fannie Mae and Freddie Mac to get them to buy loans that they knew were toxic, yet sold them as low-risk to the government agencies.

Housing Market Bubble, Burst & Fallout

The housing boom allowed millions of Americans to get mortgage loans. Many of those loans were sub-prime, had adjustable rates or were ultimately unaffordable to the borrowers. When interest rates reset a few years after the loans were originated, many borrowers were unable to make payments and defaulted.

While those borrowers faced the problem of foreclosure and perhaps filed for bankruptcy to help ease their debt burden, they were not the only ones affected by their inability to pay.

Investors that bought their mortgages (often after the loans were pooled and sold off in sections in a process called “securitization”) stopped earning money on their investments. Because Fannie and Freddie were big investors, they stood to lose a lot of cash – which put into question their ability to continue supporting the U.S. housing market by buying mortgage debt.

The FHFA (which oversees Fannie and Freddie) is taking legal action in part because of the devastating financial consequences the two companies faced. In July 2008, the federal government had to take action to make sure the two enterprises didn’t fail because, at the time, they guaranteed or owned about half of the residential mortgages in the U.S. (worth about $6 trillion).

Theoretically, the lawsuit could help recover losses that Fannie and Freddie suffered from the collapse of the housing bubble. It might also serve as a warning and/or deterrent to other financial institutions and could prompt legislative change to regulate how residential mortgages are originated, securitized and sold.

The lawsuit was filed in New York and Connecticut.

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Wednesday, August 24th, 2011

The Bankruptcy Option for Countrywide

In 2008, Bank of America acquired Countrywide Financial, a mortgage lending company that was heavily involved in subprime lending practices during the housing boom. Since the merger between the two companies, Countrywide has proven a costly addition to the Bank of America brand.

Since 2008, according to The New York Times, Countrywide has cost Bank of American tens of billions of dollars in legal fees in addition to other significant losses.

Now, media outlets are throwing around the question of whether or not Countrywide might attempt a bankruptcy filing to help ease some of its debt. Here’s a look at what some insiders are saying.

Business Bankruptcy Rules

If an individual was losing as much money as Bank of America, she would likely need bankruptcy protection. But businesses have different considerations and are governed by different laws than individuals. Consider these.

  • Limited liability: One key element that might affect whether or not Bank of America chooses bankruptcy for Countrywide is whether it’s considered liable for the company’s losses. Business mergers commonly include provisions that limit the legal responsibility shareholders (and the other business) have for the acquired business’s debt. If these laws apply, Bank of America may not need bankruptcy for Countrywide.
  • Consolidation transactions: But there’s a chance the limited liability laws won’t apply in Bank of America’s case. That’s because the bank apparently engaged in a series of complicated transactions upon its acquisition of Countrywide to transfer its profits and debts to various subsidiaries.
  • Acquisition of notes and debt: In addition to the consolidation moves, Bank of America also reportedly took on some of Countrywide’s debt and assets. This further complicates the question of whether or not Countrywide remains separate enough from Bank of America to qualify for bankruptcy on its own.

Many of the complex manipulations between Bank of America and Countrywide came to light when insurance giant AIG filed a lawsuit against the bank insisting that it is liable for the mortgage lender’s debts.

At its heart, the question of bankruptcy is one of separation and commingling. Think of it this way: Countrywide’s financial distress could have been, to Bank of America, like a frostbitten limb. If amputated in time, the rest of the body could have been saved.

But because Bank of America reportedly allowed its healthy parts to mix with the troubled parts, separating the bad stuff from the good stuff might not be so simple. Many analysts have suggested that, because of the complexity of the maneuver, bankruptcy for Countrywide is an unlikely option.

Mortgage-Related Bankruptcy for Individuals

Unfortunately, the potential bankruptcy of Countrywide holds no real poetic justice for those who turned to bankruptcy because of unaffordable subprime mortgages. Rather, the financial faltering of an entity as large as Bank of America is just another symptom of a woebegone economy whose problems started in the housing market.

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Wednesday, August 10th, 2011

Seven Mortgage Fraudsters In NJ Face Legal Trouble

Seven fraudulent mortgage modification services are facing cease and desist orders from the state of New Jersey, according to reports from NJ.com. The legal action comes from the state’s Department of Consumer Affairs and includes steep civil penalties against the firms.

Unfortunately, mortgage scams are nothing new and in fact have been fairly common since the housing market collapsed and adjustable-rate mortgages began to reset en masse. Here’s a look at how these particular companies allegedly scammed New Jersey residents:

  • Promise for negotiation: Scammers apparently piqued victims’ interest by offering to negotiate with their mortgage lenders on their behalf. This offer is understandably attractive to those homeowners struggling to make mortgage payments, who might be in danger of foreclosure or considering a bankruptcy filing to help ease their debt burden.
  • Collection of fees: Naturally, the scammers insisted on collecting payment for their work up front, before actually delivering on their promises. In many cases, consumer protection laws prohibit companies from collecting fees before performing any services.
  • Failure to follow through: Unsurprisingly, the scammers did not actually help victims adjust their debt. In fact, the seven companies weren’t even registered as debt-adjustment services, as the state requires, according to reports.

Debt Negotiation as a Bankruptcy Alternative

While New Jersey’s attorney general has now taken action to repair some of the damage these fraudsters caused, it’s likely that at least some victims endured serious financial hardship because of the scam.

On the (mildly) positive side, the scam provides an excellent opportunity to review some of the differences between debt adjustment services and personal bankruptcy.

Bankruptcy alternatives:

  • Are not regulated as strictly as bankruptcy: At both the federal and state level, there are laws designed to protect consumers from scammers like the ones that struck in New Jersey. But, as this mortgage scam shows us, it’s fairly common for fraudsters to break those laws. Bankruptcy, on the other hand, follows the same set of laws no matter where in the country a filer lives. Those laws are published online where filers can easily access them.
  • May affect credit differently than bankruptcy: One reason many people seek non-bankruptcy alternatives to eliminating or reducing debt is because of the negative perceived impact that bankruptcy can have on a credit score. But assuming your credit won’t be hurt by debt settlement or debt negotiation is a gamble: if you work with a less-than-trustworthy company, you may end up losing money and hurting your credit.
  • Do not offer the legal protections that bankruptcy does: One major benefit of bankruptcy is that filers know that they can expect certain protections (e.g. from creditor contact and collections) after they file their case. No such legal protections exist for bankruptcy alternatives.

Bankruptcy is not right for everyone, but it’s an important and powerful debt-relief option to consider for those in financial distress.

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Wednesday, August 3rd, 2011

Payday Lender Pays Big for Misdeeds

The Federal Trade Commission has scored another win for consumers. Last week, it convinced a federal court to rule that payday lending company Swish Marketing must pay $4.8 million as a penalty for tricking consumers into buying expensive debit cards they didn’t want.

The case highlights abuses that consumer advocates continue to fight against, including deceptive online advertising and negative-option marketing. Here’s a look at the case and what the FTC’s action might mean.

  • Online payday lending: The company’s web site reportedly claimed that it matched online consumers with payday lenders to meet their needs.
  • Hidden products attached: When consumers completed the online loan application, they were apparently directed to a screen that included four additional offers. Of these, three offers had a “no” box checked and one had the “yes” box checked. In some cases the additional offers were presented as a “bonus.”
  • Automatic charges: Customers who didn’t notice the “yes” box or who didn’t read the fine print ended up with a debit card that automatically connected to their bank account and charged them $54.95.

Expensive Products, Debt-Ridden Buyers

In addition to being illegal, deceptive marketing practices like the ones Swish Marketing engaged in tend to prey on those who can least afford them. In many Chapter 7 cases, for example, some of the unsecured debt that filers discharge comes from payday loans.

Payday loans are short-term, high-interest loans that often lead to serious debt for those unable to make ends meet. They provide an immediate source of cash but come with a high price tag in the long run.

Penalties for the Payday Lender

Thanks to the FTC’s action, Swish Marketing and its owners are now prohibited from:

  • Misrepresenting relevant facts about a product or service. Its improper sale of debit cards failed to explain how customers would be charged and how much the product would cost.
  • Improperly identifying a product as a “bonus.” The previous offer didn’t provide sufficient information about the “bonus” debit card, which left consumers unable to make an informed decision about whether or not they wanted such a “bonus.”
  • Charging consumers without disclosing privacy plans. Related charges against the company addressed the fact that it reportedly sold or shared customer information without warning that it would do so.
  • Failing to make sure affiliates follow the rules. From now on, Swish will be held responsible for the actions of any company it works in tandem with.

The FTC did not report how the $4.8 million will be distributed. In many similar cases, funds are used to refund money consumers lost as part of the scam.

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Wednesday, June 1st, 2011

The Harsh Reality of Car Title Loans

Legislators and consumer advocates have taken stands in recent years against payday loans, largely considered one of the most nefarious financial traps available to low-income consumers. But more recently, some worried analysts have taken up the torch of another type of absurdly high-cost loan: car title loans.

According to a recent post at CreditSlips, this type of loan can wreak serious financial havoc on consumers who can least afford to lose money. Here’s a look at some of the troubling numbers.

How Title Loans Work

Car title loans work like this:

  • A borrower enters the lender’s storefront in need of cash.
  • The lender originates a secured loan with the borrower’s vehicle as collateral. (According to sources, lenders will typically offer dollar amounts of no more than 40 percent of a vehicle’s value.)
  • Interest rates on car title loans can reportedly top 300 percent, meaning that most borrowers end up paying far more than their car’s value in interest payments over the repayment period.
  • If a borrower cannot afford to make payments, the lender has the legal right to repossess the vehicle used to secure the loan.
  • Some lenders, it seems, also sell used cars (no doubt those repossessed from customers unable to pay).

The Hidden Dangers of Car Title Loans

As most people can see, the risk of losing your car to a car title lender is pretty high, especially given the astronomical interest rates charged and the typically limited financial means of most title loan borrowers.

But, according to a recent study, the actual cost to title loan borrowers seems to be higher than expected. Sources note that:

  • At some auto title lenders, the repossession rate stands at 13.1 percent of loans - that means 1 in 8 people who go in for a loan end up getting their vehicle repossessed by the lender.
  • The typical auto title borrowers will take out between 3 and five loans from a given title lender. This means that most borrowers apparently return more than once to take on high-interest, high-risk loans.

Know Your Options

While car title loans may seem like the only way out of a tight financial spot, it’s important to understand the high risks associated with them. If you’re struggling with serious debt (or know someone who is), consider seeking the help of a bankruptcy lawyer or credit counselor for guidance.

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Wednesday, May 11th, 2011

Lawsuit Alleges Mortgage Fraud by Deutsche Bank

News reports this week announce that the U.S. Department of Justice has initiated a lawsuit against Deutsche Bank, one of the world’s largest, claiming that the institution lied to federal regulators in order to secure taxpayer-funded insurance for less-than-secure mortgages.

Here’s a look at the details and some of the underlying issues.

The Charges against Deutsche Bank

According to the lawsuit, Deutsche Bank and its subsidiary MortgageIT:

  • Initiated risky mortgage loans to homebuyers. Some of these loans may have been subprime, and since their initiation, sources indicate, about a third have defaulted.
  • Lied to federal regulators. While the loans themselves may have been a bad move financially, what interests prosecutors is what happens next: that Deutsche Bank allegedly lied to officials with the Federal Housing Authority (FHA) in order to secure insurance for the shoddy loans.
  • Got taxpayer-backed insurance for questionable loans. Because of its reportedly false claims that it was evaluating its mortgages for default risk, Deutsche Bank managed to secure FHA funding (which comes from tax dollars) for the questionable loans.
  • Required money from the government when the loans defaulted. Now, as many as 12,500 of Deutsche Bank’s loans have apparently defaulted (meaning that the homes have gone into foreclosure), leaving the government responsible for covering the losses. The money goes to those investors who own the mortgage debt. Sources note that, to date, defaulted Deutsche Bank loans have cost the government more than $386 million.

Because of all these allegations, the Justice Department is reportedly suing the bank for $1 billion, an amount that represents the dollar amount lost plus individual penalties for each mortgage that went into default.

What Mortgage Lending Rules Were Broken?

The government’s lawsuit charges that Deutsche Bank and MortgageIT failed to follow the rules required of anyone interested in federal mortgage insurance. These rules require lenders to:

  • Annually verify various records of mortgage borrowers, including credit reports, incomes and record of employment. This measure is to make sure borrowers are not at risk of defaulting.
  • Examine any loan that goes into default shortly after being originated in an effort to prevent and eliminate careless lending techniques.
  • Act in the government’s best interest, because any money needed to guarantee loans that defaulted would come directly from taxpayers’ pockets.

The lawsuit claims that Deutsche Bank did none of these things and so is both on the hook for the money lost by the government and responsible for paying penalties for breaking the rules of engagement for obtaining federal insurance.

Some sources suggest that the Deutsche Bank lawsuit could be the first of many; after all, reckless lending techniques were fairly common during the housing boom that touched off the current recession.

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