Prof. Vivian Berger, Nash Professor of Law Emerita at Columbia Law School, writes here about the misuse of civil contempt proceedings to obtain the repayment of debts. She’s right that despite our common belief that debtors’ prisons have been eliminated in America, it just isn’t so.
NCLC Issues Paper on Foreclosure Crisis’s Effect on Credit Reporting
In addition to the 4.5 million families who lost their homes, the foreclosure crisis had another insidious and long-lasting consequence, both to individual consumers and on a broader economic scale. In a new white paper issued by the National Consumer Law Center, author Chi Chi Wu explores the devastating credit reporting problems left in the wake of the Great Recession. The report explores the scope of the problem and offers a variety of policy solutions. Solving the Credit Conundrum: Helping Consumers’ Credit Records Impaired by the Foreclosure Crisis and the Great Recession. [Read more…] about NCLC Issues Paper on Foreclosure Crisis’s Effect on Credit Reporting
CFPB Takes Action Against Deferred-Interest Medical Credit Card
Following closely on the heels of the CFPB’s recent action against pay day lender Cash America, the CFPB has taken action against medical credit card company, CareCredit. CareCredit, a subsidiary of GE Capital Retail Bank, offers medical credit cards through over 175,000 offices of health care providers such as dentists and vision care professionals. In a consent order issued on December 10th, the CFPB ordered CareCredit to refund up to $34.1 million to more than one million patients who were deceptively enrolled for the medical credit card. [Read more…] about CFPB Takes Action Against Deferred-Interest Medical Credit Card
CFPB Takes Action against Payday Lender
In its first enforcement action against a payday lender, the Consumer Financial Protection Bureau (CFPB), ordered Cash America International, Inc. to refund consumers in the amount of $14 million and pay a fine of $5 million, as a result of its violations of consumer financial protection laws. Cash America, a publicly traded financial services company out of Fort Worth, Texas, is one of the largest short-term, small-dollar lenders in the country.
Deriving its authority from the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB began its oversight of payday lenders in January, 2012. The CFPB announced the action in a press release dated November 20, 2013, marking the Bureau’s first public enforcement action for failure to comply with the CFPB’s supervisory examination authority.
The violations include robo-signing by Cash America’s Ohio subsidiary, Cashland Financial Services, Inc. Cash America also extended payday loans to service members at a rate in excess of the 36 percent limit set by the Military Lending Act. Finally, Cash America was found to have impeded the CFPB routine examination by destroying records, deleting recorded phone calls with consumers, instructing employees to limit information provided to the CFPB, and withholding a report related to robo-signing.
As a result of its illegal practices, Cash America has voluntarily refunded approximately $6 million and has committed $8 million more to military borrowers and to Ohio victims who suffered from the robo-signing practices between 2008 and January 2013. Cash America has also dismissed pending lawsuits, terminated post-judgment collection activities, and cancelled all judgments in nearly 14,000 wrongful cases filed against consumers in Ohio. On top of these compensatory measures, Cash America has been ordered to pay a $5 million civil penalty. Finally, Cash America will develop and implement a plan to improve compliance with consumer financial protection laws.
CFPB Director, Richard Cordray, said of the action that it, “brings justice to the Cash America customers who were affected by illegal robo-signing, and shows that we will vigilantly protect the consumer rights that service members have earned. We are also sending a clear message today to all companies under our watch that impeding a CFPB exam by destroying documents, withholding records, and instructing employees to mislead examiners is unacceptable.”
New Filing Fee for Motions to Sell Property under Section 363(f)
The Judicial Conference for the United States has approved several changes to the federal court miscellaneous fee schedules including a new administrative fee for motions to sell property under section 363(f) of the Bankruptcy Code. Section 363(f) allows estate assets to be sold free and clear of liens and encumbrances. The committee rejected the idea of a sliding fee connected to the price of the property being sold, and settled on a flat fee of $176.00. The new fee will take effect December 1, 2013.
In instituting the new fee, the Judicial Conference is apparently taking advantage of the increasing trend in chapter 11 toward sale of businesses rather than restructuring. According to Jacqueline Palank of the Wallstreet Journal blog “Bankruptcy Beat,” this move comes in the face of a looming judicial budget crisis. A small percentage of operating funds comes from fees that the federal courts charge, and bankruptcy filing fees generate about 79% of the judicial operating funds that come from federal court fees in general. Where Congress appropriates most of the federal judiciary’s operating funds, recent government budget cuts negatively impact the judiciary. In his blog on the fee change, Cooley, LLP attorney, Robert L. Eisenbach, III, predicts that the new fee in this area could show significant revenue increase from chapter 11 cases. To a lesser extent, the change will impact chapter 7 as well.
CFPB Circumvents Rulemaking Process to Create A Bankruptcy Exemption in Servicing Rules
Without advance notice and with no opportunity to comment, the CFPB yesterday issued an interim final rule concerning the mortgage servicing regulations that take effect January 2014. The new rule now exempts servicers from the periodic statement requirement when the borrower is a debtor in bankruptcy. The CFPB states that the interim final rule “clarifies” its previous final rule on mortgage servicing, but the bankruptcy exemption is not a “clarification” of the previously issued rule. Rather, the new exemption marks a 180-degree reversal from its previous position. Previously, and rightly so, the CFPB found that the complexities of the bankruptcy scenario necessitated periodic statements for debtors. The rule allowed servicers to make changes in statements to reflect accurate payment obligations of the debtor, but put an end to servicers’ practice of stopping monthly statements to borrowers who filed for bankruptcy. Without statements, it is more difficult for homeowners to remain current on their mortgages post-petition. In developing the original rule the CFPB carefully considered input from various stakeholders and rejected a bankruptcy exemption for periodic statements. Since the CFPB sidestepped the notice and comment procedure in its recent about face on periodic statements and bankruptcy, it can only be presumed that the CFPB relied upon less public input in reversing its previous “carefully considered” decision. Shame on the CFPB!
FHFA Turns to Industry Lobbyist for Advice on Force-placed Insurance
Mortgage lenders routinely require homeowners to purchase property insurance to protect the lender’s interest in the home in the case of fire or other casualty. If the homeowner fails to purchase such insurance or fails to provide evidence of insurance, most loan documents will authorize the lender to purchase insurance to protect its interest. This coverage is called forced-placed or collateral protection insurance. Force-placed insurance has long been an area of abuse. Not only do servicers improperly place policies, but the field is filled with price gouging and illegal kickbacks. Bankruptcy debtors have not been immune from troubles caused by force-placed insurance. For example, in In re Cothern, 422 B.R. 494 (Bankr. N.D. Miss. 2010), the servicer’s unrelenting and improper efforts to collect force-placed insurance premiums drove the borrowers into bankruptcy. “The incompetence here is absolutely radiant” is how the judge in Cothern describes the servicer’s conduct.
After years of effort to get Fannie Mae and Freddie Mac to address the problem of force-placed insurance, Fannie Mae unveiled a plan last year that would have limited financial ties between servicers and insurers. In February of this year, FHFA, the agency that oversees Fannie Mae, vetoed Fannie Mae’s plan–a plan that would have lowered the cost of force-placed insurance significantly. Now we learn from Jeff Horwitz at American Banker that FHFA’s “outside expert” on force-placed insurance is actually an industry lobbyist who is well versed in protecting financial institutions. For more details, read Jeff’s article here.
Are subprime loans making a comeback?
An article in Sunday’s Los Angeles Times suggests that lenders in markets with rising property values, such as California, are looking to increase their subprime lending. While current mortgage interest rates are around 3.5%, these subprime loans come with interest rates starting at 7.95% and going up from there. As with the old subprime products, high fees are common for this next generation of subprime loans. So what’s different? Most new subprime loans require much higher down payments and evidence of the ability to pay.
Addressing the “Gordian Knot” of the Mortgage Foreclosure Crisis
In an ongoing struggle to untie what she deemed the “Gordian Knot” of the mortgage foreclosure crisis, a Special Master in Rhode Island expressed frustration at the stubborn refusal of Freddie Mac and Fannie Mae to consider good business solutions to this serious national economic problem. The Special Master, a former local banker, was appointed to oversee mediation and possible settlement in a case consolidating approximately 600 foreclosure actions in a federal District Court action. In re Mortgage Foreclosure Master Docket, No. 11-88 (D. R.I. Oct. 4, 2012). At a status hearing, the Special Master issued two reports, which include these scathing remarks about FannieMae and FreddieMac and their unwillingness to consider principal forgiveness:
“An exception in scheduling was made for FNMA / FHLMC cases. They are involved in a significant number of cases, but were not scheduled because I did not believe the result would be productive. I have made no secret of how troubled I am by these agencies and, to a lesser extent, their respective counsel. Most of the defendant servicers, off the record, describe how bureaucratic and difficult to deal with FNMA and FHLMC are. They have cost our taxpayers billions. And lawyers who have clients like FNMA / FHLMC have the capacity to litigate indefinitely because their clients are unresponsive to good business solutions. So our taxpayer dollars are being utilized to fund a significant amount of lawyering that may not be productive from a business standpoint. Privately, counsel to other defendants also will say as much.”
“The reason the settlement process – nationally and in the Special Master process – has not been as productive as we want is that the decision-making corporate players – FNMA, FHLMC, and the servicers – generally start from a premise that is largely uneconomic for an individual borrower. They do not forgive principal. Rather, they try to figure out what a defaulting borrower can “afford” to pay monthly, and by reducing the interest rate, stretching the amortization out to 40 years, and putting a balloon on the back end, leave the principal balance of the mortgage intact.
“May I say it directly: This is WRONG!
“For the many borrowers who want to stay in their homes, they accept this solution if offered. But just as these borrowers were probably not astute financially, overleveraged themselves, and made imprudent or unrealistic economic decisions earlier, they remain naïve consumers. A defaulting borrower staying in a significantly underwater house is economic folly and can have serious adverse, longer-term personal consequences. And, unfortunately, just as the system before encouraged inappropriate overleveraging, the system now, for a variety of reasons, continues to promote poor economic decisions on the part of average borrowers.”
Forgiving Our Debtors (Unless They Are Prisoners)
Through various provisions in the Bankruptcy Code, Congress has identified debts that should not be forgiven. These include, for example, debts for certain taxes, debts for money obtain through fraud, debts for domestic support obligations, and debts incurred from drunk driving (think, personal injury or wrongful death judgments). Congress has also identified debtors that will be denied a fresh start because they acted badly and contrary to the bankruptcy process. This usually happens when the debtor is not honest and makes false disclosures with respect to assets and property.
Nowhere in the Bankruptcy Code does Congress prohibit prisoners from filing bankruptcy.
While Congress has not precluded prisoners from being debtors, a bankruptcy court in the recent decision In re Moore, 2012 Bankr. LEXIS 3897 (Aug. 24, 2012) has effectively done just that. If you are a prisoner, your case will be dismissed. Why? Because as a prisoner, you are not at liberty to personally attend the meeting of creditors (also known as the 341 meeting). Section 343 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 4002 require the debtor’s presence at the meeting of creditors. However, the Moore court acknowledged that it had discretion to waive debtor’s presence at the meeting of creditors for the physically disabled, gravely ill, or deployed military personnel. But the court concluded that “incarceration did not constitute a good and sufficient reason to waive the debtor’s attendance.” Since issuing its opinion, the court has issued a show cause order why the debtor’s case should not be dismissed for failing to attend the 341 meeting.
So much for forgiving our debtors…