Bank Lawyer's Blog

Evanston and Chicago: A Tale Of Two Cities

The punch a federal district court judge connected to the face of Chicago may knock some teeth out of the jaw of Evanston. At least, that's the slant of Evanston Now.

I haven't read Evanston's ordinance, but from the lengthy description of it in the linked article, it seems to be crucially different than Chicago's ordinance. Chicago made mortgagees, as well as owners, responsible for the upkeep of properties and to pay registration fees. Evanston appears to make mortgagees responsible to register and maintain the properties only after they have "taken control" of the property. Prior to that event, the city may hire a contractor to maintain the property and issue a lien against the property for those expenses, but that conduct seems as if its certainly permissible under constitutional principles. Again, I have not studied the two ordinances, but from the press reports, the differences between them seem critical.

If I were Evanston, I would not be sweating the recent decision in Chicago. The assistant director of Evanston's Health Department, Carl Caneva, seems to agree.

“As of right now that does not affect how we act or how our ordinance is in effect,” Caneva said. “We are a home rule city and we have our own ordinances.”

That's a bit of a lawyer-like response, but we'll let it pass for now. The ultimate issue isn't that Chicago and Evanston are different municipalities with their own ordinances, it's whether Evanston's ordinance suffers from the same constitutional defects as Chicago's. If it does, than sooner or later a lawsuit will seek to overturn it. While the article does drill down on that aspect, it appears from a drive-by look that it does not.

North Las Vegas Bails Out On A Bad Idea

Although Richmond, California, is apparently undeterred by litigation, North Las Vegas, after having been sued by a resident over its plans to use the power of eminent domain to seize underwater mortgage loans from lenders, has decided to cease and desist from from further pursuit of the hare-brained scheme.

The city council in North Las Vegas, Nevada, on Wednesday rejected a plan to use eminent domain if necessary to help refinance "underwater" mortgages, an idea the mortgage industry opposes at a time when property markets are recovering.

The council voted 5-0 against the plan proposed by Mortgage Resolution Partners (MRP) for a partnership with North Las Vegas to buy the mortgages or seize them through eminent domain, a move critics said would unsettle the market for private-label mortgage-backed securities and push mortgage interest rates up.

The linked article also notes that other governmental entities like San Bernardino county and the cities of Fontana and Ontario have also bailed out of the scheme. While opposition from residents, mortgage investors, and such entities as Fannie Mae and Freddie Mac certainly played a part in the decision to drop such plans, a North Las Vegas city council member hit  a nail on the head as to why this plan may be headed to the dustbin of history: rising property values.

City Councilman Wade Wagner questioned the San Francisco investor group's proposed use of eminent domain for acquiring delinquent and performing underwater loans. A mortgage is under water when its unpaid balance is more than the market value of its property, a common problem in Nevada's third-largest city. 

"They want the performing mortgages they assume will default two, three, four years down the road. That's a mighty big assumption with property values climbing," Wagner told Reuters.

The article states that home prices in North Las Vegas are up 23% from the same period last year. If a rising tide lifts all boats, then a lot of underwater mortgages may be rising to to the surface. If the trend continues, taking a controversial, and perhaps expensive, action seems to make little sense.

The time for this scheme was, in my opinion, never. However, whatever your opinion on the merits of Recommended links and poststhe plan, time does not appear to be on its side. I guess the political hacks who dreamed it up to profit their "advisory" firm will have to come up with the next great idea to misuse police powers in order to line their pockets.

Tribes vs. New York: Round 2

If New York state banking superintendent Bernard Lawsky thought that the Indian tribes that he is pursuing in an attempt to choke off their Internet payday lending activities in his state were going to meekly come to heel, they quickly disabused him of that notion.

Two Indian tribes on Wednesday sued a New York regulator in an effort to preserve their ability to make online loans to the state’s residents.

The tribes sought an injunction against Benjamin M. Lawsky, superintendent of New York’s Department of Financial Services, in U.S. District Court for the Southern District of New York.

Earlier this month, Mr. Lawsky ordered 35 online and tribal lenders to stop offering “illegal payday loans” in New York, saying they violated a state-imposed cap on interest rates  charged to consumers.

Mr. Lawsky also pressed banks and the group that oversees an electronic payments system to cut off access to those lenders.

The tribes, however, say they don’t need to don’t need to comply with the law of New York or other states because they enjoy sovereign status under federal law.

“The states have no authority to regulate these tribes in a way that limits their sovereign rights,” said David Bernick, a lawyer with Boies Schiller & Flexner LLP, who represents the tribes. “That is a bedrock principle of law.”

The lawsuit was filed by the Otoe-Missouria Tribe, located west of Tulsa, Okla., and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, located near the Wisconsin-Michigan border. The Otoe-Missouria tribe operates American Web Loan Inc and Great Plains Lending LLC and the Lac Vieux tribe operates CastlePayday.com.

“Through a campaign of misrepresentations, threats, and coercion, the State of New York has launched an attack on the plaintiff Tribal Nations’ inherent sovereignty,” the lawsuit reads.

Lawsky should have been prepared for the fact that the tribes are not wimps. They've been waging jihad on the CFPB for some time.

Consumer advocacy spokespersons, predictably, were outraged by the tribes' insistence that tribal law preempts state law. The tribes responded to such outrage with an analogy that I am convinced was not intended to be ironic, but certainly was.

Tribal lenders compare their online lending operations are similar to Indian-run casinos.  They argue that their operations are legal because borrowers who take out loans agree that a tribe’s law, rather than their state’s law, applies to them.

Yes, that's a winning public relations argument: our payday operations are just like gambling. The odds overwhelmingly favor the house and we make money off the losses of thousands of the addicted. That's not exactly their preemption argument, but it might as well be if they insist on continuing to compare taking out a payday loan to letting it all ride on the pass line. Just sayin...

It's interesting that some of the tribes' competitors are backing New York.

Other lenders disagree with this argument. The largest ‘payday’ lenders, which also offer loans online, say they are careful to only offer their loans in states that allow them, and are careful to comply with state regulations.

“Bad actors tarnish the good reputation of regulated lenders who operate within a complete  framework of federal and state regulations,” wrote Jamie Fulmer, a spokesman for Advance America, the largest U.S. payday lender, in an e-mail earlier this month.

Mr. Fulmer said his company, which also runs an online lending operation “does not lend in New York or any state where our services are prohibited.”

"The good reputation." The article doesn't reflect any collapse into hysterical laughter, so I guess he was serious. You don't make loans in New York because, unlike the Indian tribes, you don't have a valid preemtion argument to make. It sounds like sour grapes more than legitimate support for the high road.

At any rate, the tribes are likely to continue this fight. The money at stake is substantial, and as long as there's a chance that the preemption argument might prevail, there's no reason to back off.

More Foreclosure Fees Misconduct?

As we discussed recently, the Colorado Attorney General and, apparently, law enforcement officials in other states, are investigating potentially explosive allegations that foreclosure law firms have been inflating fees for years. The Denver Post's David Migoya has unearthed additionally seedy conduct by foreclosure lawyers in Colorado that's related to Colorado's unique "public trustee" foreclosure process.

At the risk of losing their homes if they didn't, scores of Colorado homeowners struggling to avoid foreclosure in the past year were each forced to pay hundreds of dollars in lawyer charges for phantom court cases against them, a Denver Post investigation has found.

Those charges, which homeowners in the state's largest counties unnecessarily had to pay to bring their property out of the foreclosure process, totaled more than $40,000. The law firms billed the charges to be reimbursed for having filed the lawsuit and posted a legal notice about it, records show.

Although the fees were very real, the cases and the notices were not.

The Post found 126 foreclosures since January 2012 in which homeowners in 11 counties were told by county public trustees to pay the charges associated with the filings or the foreclosure would continue. But, in fact, no foreclosure lawsuit was filed.

The Post also found that the practice has been going on at least since 2006, according to random checks of prior years' District Court and county public-trustee records.

[...]

The charges — sometimes as much as $300 to file or "docket" a case and $150 to post the notice about it — appear on bills that lawyers submitted to public trustees after a homeowner formally requested the amount necessary to stop their foreclosure.

Those bills, called cure statements, detail the expenses lawyers hired by a foreclosing lender say they've paid or incurred, along with their legal fees to handle the case, the amount a homeowner has fallen behind on their mortgage, interest, late fees and the costs of the county public-trustee's office.

Homeowners are instructed to pay the whole amount by a certain date — no partial payments are allowed — if they want the foreclosure process to end. Otherwise, it continues, and they risk losing their home to public auction.

As Migoya points out, Colorado's public trustees, who conduct the foreclosures under that state's foreclosure system, are forbidden by law from questioning the lawyers' cure statements. Instead, the law relies on the integrity of the "officers of the court" to not file false statements of charges. While some of the foreclosure attorneys have alleged that their statements of fees are merely "estimates," the linked article quotes a Denver judge as flatly ruling that they are statements of fact, not opinion. If that's the case, then the "phantom" foreclosure charges are false statements made to the court, and that's serious business.

If these preliminary investigations continue and eventually bear fruit, there are going to be some lawyers in Colorado who are in deep water without a life jacket. I hope they're all strong swimmers.

Beating On Banks To Squeeze Payday Lenders

The war on payday lending has turned from the lenders themselves to the banks that service them. One of the latest battles in this war is being waged by Maryland's commissioner of financial regulation, Mark Kaufman.

These banks provide access to the network that allows online payday lenders to automatically withdraw loan payments from customers' accounts.

The institutions are all outside Maryland and the reach of the state regulator, but Kaufman said his office has turned over the names of eight banks to federal regulators in recent months. These banks know or should know that they are helping process loans that are illegal in Maryland, Kaufman said.

Maryland is not plowing this field alone.

New York's financial regulator, for instance, recently sent letters to 117 banks, asking them what they are doing to stop illegal payday loans from entering that state. Without banks providing access to the Automated Clearing House network, online payday lenders would not be able to debit consumers' accounts, the regulator said.

"This is a new tack that states are taking," said Alex Horowitz, research manager for the Pew Charitable Trusts.

Federal regulators also have been warning banks about online payday loans. The Federal Deposit Insurance Corp. told banks last year to monitor their relationships with third-party payment processors that may be requesting withdrawals from customer accounts on behalf of payday lenders. Ultimately, the FDIC said, the banks could be held liable for any fraudulent activity.

Even Stevie Wonder could see the handwriting on this wall.

Online payday loans typically involve two banks — the borrower's bank and the payday lender's institution.

Kaufman said borrowers' banks have been working with his office to address consumer complaints, closing accounts to stop withdrawals.

But these illegal loans wouldn't have been possible to make in the first place without the help of another bank debiting borrowers' accounts on behalf of the payday lender, Kaufman said.

"They are the entry point into the system," he said. "Without them, none of this works.

Nope, none of this works without them. Therefore, expect the Feds and the states to work together to make sure as much glue as possible is squirted into the cogs of the payday lending machine via making life difficult for the banks. After all, you don't want people borrowing at high rates from lenders that regulators can get at when there are plenty of made men who are happy to supply the cash sub rosa. Their collection practices make even the debt collectors that Commissioner Kaufman complains about in the linked article look like choir boys.

For some reason, Kathleen Murphy, CEO of the Maryland Bankers Association, insists on ending the article on the sour note of personal responsibility.

"At the end of the day, it comes down to the consumer making smart financial choices," she said. "To decide they need an advance on their paycheck at an interest rate of 500 to 600 or 700 percent annually is not a smart financial decision."

No, it's not a smart decision. And it's the job of government to save people from the consequences of their dumb decisions. Why? Because that's the way the Nanny State rolls.

Blowing The Whistle On Foreclosure Lawyers

The Colorado Attorney General's Office has been investigating the major foreclosure law firms in that state for allegedly inflated billing practices. Most of you outside of Colorado may have heard little about it, since, as Housing Wire publisher Paul Jackson points out, the trade press has been strangely silent (other than Paul's Housing Wire). Paul suggests a reason for that silence: "at least one trade media outlet owns their own attorney guild."

Maybe yes, maybe no. Whatever the reason, it is odd that Housing Wire seems to be the only trade press publication that is running with the story.

The investigation centers around allegedly inflated charges for foreclosure costs, such as costs for posting of notices. Here's how Paul explains the issue.

At the core of the investigations, sources tell me, is how foreclosure law firms billed for allowable “costs” in conjunction with the foreclosure – with the lever being loans insured or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.

While the GSEs set a public and fixed-fee schedule for foreclosures, they also allow law firms to bill for variable, additional reimbursable costs — typically things like process of service or posting and publication of notices, as well as filing fees with the courts. These pass-through costs are typically borne by the law firms and then billed back to their clients as an allowable cost; and in some cases, like filing fees, the fees are set by the court.

But in other cases, the fee structure is much more flexible. And it’s in these reimbursable costs that serious questions are starting to be asked by both Federal and state officials.

Here’s why: it turns out that many of the major law firms responsible for managing foreclosures for the GSEs also have a controlling interest in the ancillary service firms that generate the variable fees that appear as “costs” on the lawyer’s bill. Many law firms either outright own, or their partners have a significant interest in, the company that is posting and publishing notices; or they may own or have an interest in the company that manages process of service, as well.

It's not illegal for a law firm to own such a business, but it is illegal to inflate the "costs" of foreclosures by use of those firms, which is what is alleged to have happened. In one of the press reports that Paul links to (the Denver Post has been following the story as a matter of local interest), a whistleblower in one of the firms has alleged that is exactly what has occurred. The spread of the investigation to other firms indicates that the Colorado AG thinks that the practices may be widespread. According to Paul, Colorado may be the canary in the coal mine.

According to sources I’ve spoken with, similar investigations into foreclosure billing practices are already active in key states on the Eastern seaboard, too, even if the subpoenas haven’t been made public.

If there's substance to these allegations (and the fact that an attorney in one of these firms would risk her career by blowing the whistle gives some initial weight to the allegations), this is going to get very nasty. The law firms likely won't go down without scorching some earth, as the discussion indicates in one of the articles, where the law firm claims that the whistleblower was a "special counsel" to the law firm on the issue and, therefore, cannot divulge confidences of her "client" or breach attorney-client privilege.

If other states also make public similar investigations, maybe the rest of the trade press will begin to report on this, as well. After all, the story has all the elements the average American loves to hate: lenders, foreclosures, and attorneys.

UPDATE 08.19.13: EDITED TO FIX BROKEN LINK TO JACKSON'S BLOG POST.

Cutting To The Core

I said last night that the post I made then on the eminent domain plan of Richmond, California, would be my last until there were further developments in the litigation. I lied.

I received an email from a prominent financial services lawyer who will remain troll-free by remaining anonymous. My correspondent has figured out the economics of the eminent domain plan. His or her email follows in its entirety:

Have I missed something about this scheme?  Where is Richmond going to get all the money to fund this?

If they condemn and take the mortgages for fair market value, I am guessing that they will not turn around and sell them for less than fair market value.  But they will have to pay substantial transaction costs, not the least of which is to their "advisor" Mortgage Resolution Partners.  That money will have to come from somewhere, which presumably means the fine taxpayers of Richmond.  On the other hand, if they sell the mortgages for more than it cost to buy them, doesn't that tend to indicate that they didn't pay fair value for them in the first place?  And doesn't that create a little 5th Amendment problem?

I went to the dubiously named "Fact or Fiction" page of MRP's site to see what they say about it, and here it is.  With the MRP combination of ivory tower thinking and big government philosophy, I don't know why I didn't see this coming, but I didn't:

Fiction: It is not economically possible to cover administrative and capital costs unless the local government pays less than fair value for the loans.

Fact: The local government can cover these costs because the public-private partnership will invest additional money, time and effort to refinance the loans into more valuable, fully documented loans with a far lower probability of default.  In fact, the public-private partnership will be more successful at refinancing the loans then [sic] a private enterprise would be acting alone, without the credibility and participation of the local government and community. This is precisely the same as when a government purchases a farmer's land and develops it into a toll road or an airport. The project can cover its costs (and more) because the toll road or airport produces far more revenue than the farmland.

So there you have it - academia and government will do it better than private industry.  We can all sleep better now.

I know I'll sleep better.

Eminent Domain In The Mortgage Arena Gets A Court Test

I promise that this will be the last of the Richmond, California posts for awhile or until there's another development in the court case, but the example of political hubris merits at least some passing snark.

After writing my last post on the subject, the city was sued (paid subscription required) by some of the largest banks in the country as trustees of mortgage-backed securities trusts owned by the likes of Black Rock, Fannie Mae and Freddie Mac. In other words, entities with the financial resources to burn your house down with legal fees and costs.

The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that loans aren't being seized for a valid public purpose—a key criterion for a city that invokes eminent domain.

"Mortgage Resolution Partners has led the city of Richmond into an unprecedented use of eminent domain seizure that is unconstitutional, harmful to homeowners and taxpayers, and unfair to millions of individual savers and investors," said John Ertman, a partner at Ropes & Gray in New York.

The concoctors of the scheme, an Ivy League (albeit, the back door to the bargain basement of the Ivy League) university professor and MRP, the gang of ex-Clinton administration sharks who stand to profit well from this scheme, pooh-poohed the lawsuit.

An MRP representative said it was confident its proposal is "entirely within the law." "No investor in any trust will be made worse off by the sale of any loan," said a company spokesman.

[...]

Legal advocates of the eminent-domain plan have said that constitutional challenges aren't likely to hold up in court. The loan strategy wouldn't burden interstate commerce "because it doesn't prevent credit from flowing in any particular way," said Robert Hockett, a Cornell University law professor who advocates for using eminent domain to seize underwater mortgages.

"This is a bluff," said Mr. Hockett. "It's meant to scare city officials into saying, 'Oh, who are we to argue with the big guns.' "

Mr. Hockett isn't footing the legal bills of the city, so his bloviating from the ivory tower might ring hollow to some. Then again, a crackpot Ivy League professor-cum-Cherokee-princess concocted out of whole cloth the idea for another mammoth federal government bureaucracy designed to ensure that consumers too stupid to make their own decisions about financial products were wet-nursed from cradle to grave, and that hare-brained bureau is now "The Law of the Land" (as its creator so inaccurately put it recently). Therefore, never underestimate the damage an intellectual with no business sense can inflict on this country, especially when aided by "liberal" bureaucrats and pols who've sold out to the dark side.

The mayor of Richmond also ejaculated a breath-taking font of bravado.

Gayle McLaughlin, the mayor of Richmond, Calif., says she’s not deterred from moving ahead with the city’s plan to forcibly purchase mortgages from bondholders using the city’s power of eminent domain despite a court challenge and the possibility of additional action by a federal regulator.

“We feel strongly that we’re on legal ground,” she said in an interview with Developments. “We’re not afraid of going into the courtroom. We believe our legal reasoning will prevail.”

As any combat veteran will tell you, only the abysmally stupid or certifiably insane are not afraid of firepower on the other side of the line. One of the commenters to the linked article responded appropriately.

Note to stupid leftist mayor McLaughlin: Your hubris is not a winning legal strategy.

The lack of so many Democrats supporting you should tell you something, but if you want to self-immolate for the sake of ‘making a statement’, I will enjoy the show. Pass the popcorn!

As long as we continue in the smack-talking stage, we'll pass on giving the matter further attention. On the other hand, it will be interesting to see how this plays out. If Richmond wins in court, the next battle is going to be seeing how the federal government forces lenders to loan in Richmond without imposing a risk premium on the loans. I'm sure we can all think of many social engineering solutions to that conundrum, can't we?

Richmond Throws Down; Moody's Throws Up

In response to the recent announcement by the mayor of Richmond, California that the city plans to seize underwater mortgages from investors through the power of eminent domain, Moody's announced that such a move would be "credit negative" for mortgage backed securities generally.

If Richmond successfully implements its plan, other cities would be encouraged to adopt similar plans that would increase losses on RMBS.

Due to rising home prices, it is unlikely that Richmond and other cities will successfully put eminent domain into action that will deal with underwater mortgages, Moody’s said.

Mortgage Resolution Partners, the plan’s creator, has marketed the plan to cities and local governments for more than a year as a solution to stopping defaults and foreclosures. However, with home prices rising, borrowers will have less negative equity and thus be less likely to default.

[...]

According to Moody’s, cities would be likely to face effects from adopting the plan. Lenders concerned about future eminent domain action likely would restrict credit to borrowers in those cities, force lower LTVs as additional protection from loans becoming underwater or pass higher costs on to the borrowers.

[...]

Any city implementing the plan would increase losses on RMBS, said Moody’s. The price paid to RMBS trusts will be significantly less than the fair value of the home, according to MRP.

Without eminent domain, the expected recovery on those loans would be greater. Initially, many borrowers on underwater loans who remained current until now would continue to make their payments and there would be no losses. Additionally, as home prices continue rising, there will be less of a likelihood that borrowers will default and, even if they do, will reduce ultimate losses.

“If only Richmond and a handful of other cities implement the plan, overall losses to RMBS will be small. In the event that the plan becomes widespread, which we do not expect, losses would be significant,” said Moody’s.

So, all-in-all, one of the agencies that rates the securities backed by the loans that would be seized thinks the entire scheme is a really lousy idea whose time may already have passed. Perhaps it's time for the ex-Clinton administration hacks who concocted this plan to line their own pockets through the guise of helping underwater home owners to come up with their next big brain storm. How about seizing the grandchildren of banks board members and selling them to pedophiles through the power of posse comitatus, or, seizing the spousal units of senior management of community banks and holding them for ransom under the theory of Inter arma silent leges("During war, laws are silent")? As long as we're solving economic woes by taking other people's "stuff," why not their persons?

Richmond Throws Down

After all the false starts, hollow threats, and futile chest beating done by a number of municipalities across the country, one of them--Richmond, California--finally appears to be getting off the dime and actually threatening lenders with the use of eminent domain to seize underwater mortgages and reduce principal balances (paid subscription required). Richmond's Commissar Mayor is all fired up and ready to go.

"We're not going to back down," Mayor Gayle McLaughlin told reporters on a conference call Tuesday. "We feel it's the responsibility of the servicers and banks to correct this."

By "this," we assume she means decades of municipal government (as well as state government) neglect, overspending, overtaxing, and living the municipal high-life in the land of fruits and nuts, as opposed to spending less than you raise in "Bidness-Friendly" locales like the one where they wear Justin boots and spit a load of chaw on your freshly polished Florsheims for using phrases like "I'm headed to the spa for a bikini wax" and "You simply MUST try the Brie!" We certainly see why it's the responsibility of investors in mortgage loans to pull the fat of irresponsible municipalities and their dead-beat denizens out of the fire of inevitable consequences. That passes for "fair" in this twisted age.

Of course, Madame Mayor thinks, as have short-straw-holders since time immemorial, that her citizens have "had a bunch of junk done to 'em."

In Tuesday's conference call, Mayor McLaughlin said city residents support her plan because many of them feel they were trapped into loans they could not afford. "Many of these people were directly targeted by subprime mortgages and predatory lending practices," McLaughlin told reporters. "We have neighborhoods that are suffering blight, which creates crime."

Gayle, you had neighborhoods suffering blight, which created crime, prior to the onset of the subprime mortgage meltdown and you'll continue to have them as long as you promote policies that drive jobs and the capital that creates them to places like Texas. From a narrowly selfish standpoint, I encourage the mayor to continue down the road to perdition, but as someone with a larger view, I am considering dialing 911 and seeking an expert EMS unit skilled at removing craniums wedged in posteriors without inflicting unnecessary further brain damage. The war for my immortal soul rages on.

Mortgage Resolution Partners, the cabal of ex-Clinton administration zealots/investment bankers who hatched this Rosemary's Baby of a scheme, and stand to make beaucoup fees from it (a fact mentioned nowhere in the linked story), claim that the underwater loans are ripe for refinancing through Uncle Freddie and Aunt Fannie. Unfortunately, their parent, the FHFA, has threatened to sue to stop this scheme. So has the securitization industry.

Tom Deutsch, executive director of the American Securitization Forum, called the city's actions "unconstitutional and dangerous."

[...]

"Both federal and California law clearly show that this scheme is illegal," Deutsch said. "Potential homebuyers in Richmond will have to pay more for mortgages to cover the risk of eminent domain or simply not be able to obtain a loan at all."

While all of this might provide some passing entertainment, it smells like it's going to turn into a Sharknado-like feeding frenzy in which trial lawyers will be the only ones left swimming. In other words, just another day in this over-lawyered paradise.