Bank Lawyer's Blog

Compounding Your Errors

Because we've been relentless in our coverage of Bank of America's repeated foreclosure faux pas over the years, it's only fair to welcome to the slap-fest BofA's erstwhile partner in slime, CitiMortgage. Like the bank America love's to call its own, Citi also knows that when it comes to generating bad publicity for banks in general and big banks in particular, nothing works better than breaking into and looting a house the bank does not own.

Until this year, Honesdale attorney Jeffrey S. Treat thought he had seen everything in the wild world of home restoration, flipping and landlording.

CitiMortgage and its agents confused his handyman’s special — a small, long-vacant foreclosure he purchased for cash at 1526A Thackery Ave. in Scranton — with a home it foreclosed on two doors down.

In several visits from June through July, the bank cleared Treat’s building of its contents, including tools, building materials and replacement windows.

The bank changed the locks and crudely padlocked and posted the home.

This came as a great shock to Treat, who had no mortgage on the home and no relationship with Citi.

Unable to reach an agreement with the bank or the company that did the property clean-out, Safeguard Properties of Valley View, Ohio, Treat sued them and CitiMortgage Inc. of O’Fallon, Missouri, for the $3,500 estimated worth of what they removed and $5,000 for trespassing and damages.

A spokesman for Citi said Safeguard Properties and Treat are trying to resolve the issue. But Treat is past negotiating and is preparing for court.

“I don’t live there, and it was just tools, lumber and whatnot, but it’s just bizarre that this would happen,” he said. “It’s my place and all these people were in there and they took my stuff. Yeah, I feel violated.”

If you're going to pick on an individual to abuse in this fashion, who better than a lawyer? Sure, people love to loathe attorneys, yet as a group, they have the annoying habit of not being intimidated by big institutions, knowing their way around a courthouse, and, most unfortunately of all for giant financial institutions, matching bankers tit-for-tat when it comes to displaying your inner A-hole.

Not that Jeff didn't have provocation to sue the beatitudes off of Citi, you understand.

All summer, there were subtle and not-so-subtle clues that a big bank was about to pounce on his property. Treat tried to warn everyone, but never suspected a confused mortgagor would trespass, break into his property and remove everything in it.

It started when he found oversized sheriff’s sale notice on the house, citing a CitiMortgage foreclosure. He called the big law firm handling CitiMortgage’s foreclosures.

“You got the wrong house,” he said. He researched Citi’s actual foreclosure, found the property they wanted was two doors up, which he said was in much better shape than his dusty gut-job. He thought that was the end of it.

He continued working on the property, often with help from his father-in-law, who is retired and enjoys the activity. Through the summer, the grass was mowed regularly.

Treat concluded his father-in-law was taking care of the lawn.

His father-in-law thought Treat was taking care of the lawn.

They never discussed it.

Turns out, it was probably CitiMortgage and Safeguard Properties.

“That shows you what kind of guy I am,” Treat said. “I didn’t even thank my father-in-law for the work I thought he was doing, otherwise I would have known that Citibank was treating my property as though it was theirs.” He gets wind of people on his property and makes a visit, finding the locks changed, the home cleared and a padlocks attached from the outside.

The neighbors watched it happened, thinking Treat fell behind on his payments.

Treat broke into his own property, saw his stuff was gone and replaced by a Safeguard sign-in clipboard where employees logged their visits and what they had done. Treat’s tools, replacement windows, even bags of cement were gone. Treat put up a sign to CitiMortgage and Safeguard, telling them to that it is not their house.

The bank's contractor, who stole Treat's tools, could have settled up by just paying a premium on the "conservative estimate" Treat gave it for the value of those tools. Instead, it decided that nickel-and-diming was the way to best address the "reputational risk" that the federal bank regulators claim is of major concern when a bank engages in questionable activities, like processing payments for an online dating service or a payday lender. We assume that breaking and entering might also qualify as "high risk" of damaging a bank's reputation.

Treat sued them for five large in small claims court.

Citi could still have cut its reputational losses by cutting Treat a check. I mean, going to small claims court when the only issue involves an amount that Treat claims is "not even an hour of fuel in a corporate jet" seems like bullying the little guy, especially when the question of liability is cut-and-dried. However, according to the linked article, both the bank and its contractor have hired lawyers to contest the proceeding. I hope they show up at the right courthouse. Their track record does not give one encouragement. I suggest the use of a seeing eye dog.

You have to wonder who at the bank is making the judgment call to slug this one out. Treat's getting all the favorable press, and whether or not he gets the full monty financially when he gets his day in court, he's already exacted his pound of flesh in the court of public opinion. The negative publicity hit has got to be costing Citi more than simply paying the guy a few grand and keeping this embarrassing episode out of the newspapers.

Things could have been worse, I suppose. Treat could have had a pet parrot in that house.

FHFA Takes A Baby Step

Even though she managed to lose the governor's race in heavily-Democratic Massachusetts to a Republican (thereby earning the disdain of Democratic strategist David Axelrod), and even though a federal district court last month dismissed her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, on the basis that the court system doesn't have the right to "second guess" the FHFA's business judgement (isn't that a novel concept!), Massachusetts AG Martha Coakley still had the gall to issue a public statement about the FHFA's recent decision to back off its policy of refusing to consent to the write-down of loan principal where a foreclosed house is sold back to the defaulting owners.

“The reversal by FHFA of Fannie and Freddie’s policies, which we have long advocated for and brought suit over in part, alters some of their rigid policies to help keep people in their homes,” she said in a statement Tuesday.

To help keep people in their homes who didn't pay their loans as they agreed to pay them and who are getting a better deal than they originally bargained for, at the expense of Uncle Freddie and Aunt Fannie, both of which have been de facto nationalized. I guess that would be a Progressive's orgasmic night dream were it not for the fact that Coakley had absolutely nothing to do with the policy reversal and, more telling, the "reversal" will not help that many homeowners remain in their homes.

However, the impact of the change could be limited. It will only apply to the 121,000 homes that Fannie and Freddie have already foreclosed on and own, a provision that’s intended to curtail any incentive for borrowers in good standing to default. That narrow scope is unlikely to quiet the drumbeat for the FHFA to make bigger changes intended to help a larger number of borrowers who owe more than their homes are worth.

Foreclosed-upon borrowers will also still need to find the cash or financing to buy the old home back at market value, a tall order for those with tarnished credit histories.

“This is a ‘feel-good’ type of policy. It’s directionally helpful to a small number of homeowners that ran into trouble, but at the end of the day, I don’t look to this to have a major policy impact,” said Clifford Rossi, a finance professor at the University of Maryland.

[...]

The new policy in effect reduces mortgage principal, albeit for a small number of foreclosed-upon borrowers. Some nonprofit groups said that Fannie and Freddie would be better served to reduce the borrower’s principal before a foreclosure.

Fannie and Freddie wouldn't be "better served" by such a policy, although delinquent borrowers, Nanny-State lovers, and the fake Native American politicians they so love to lionize would definitely be "better served."

Speaking of which, the fact that 1/32 Cherokee Princess Fauxcahontas went all "jihad" on Mel Watt last week obviously had more to do with this latest publicity stunt than any dismissed lawsuit by a pol who couldn't beat Abu bakr al-Baghdadi in a race for Prime Minister of Israel. You could see the flop sweat flying off of Watt's brow at that Senate hearing like angel dust in the aftermath of a Lindsey Lohan sneezing fit. It's not pretty when a cougar eats her young.

The FHFA's position has long been that it does not want to engage in any process which encourages borrowers to default in order to gain what are, in effect, write downs of underwater mortgages. This is, in theory, especially important in light of the fact that Fannie and Freddie are in conservatorship and, ultimately, it's the American taxpayer on the hook (leaving aside the fact that both entities have become cash cows pouring their profits into the US Treasury). This is only a baby step toward fulfilling the call for widespread write-downs for political ideological humanitarian reasons, but then, every long journey begins with the first step, no matter how tiny. Between now and 2017, it would not be at all surprising to see the pace quicken and the stride lengthen.

Disparate Impact's Bump In The Road

In today's American Banker (paid subsciption required), Rachel Witkowski riases some good points about the potential impact of the recent decision of federal district court judge Richard Leon's recent decision that HUD's use of disparate impact violates the Fair Housing Act. For one thing, it throws a monkey wrench in HUD's use of the questionable theory, even though other ideologically-driven regulators like the CFPB and the US Justice Department may not be deterred from continuing to use it as cudgel with which to beat lenders senseless.

It is unlikely to stop other regulators, including the Consumer Financial Protection Bureau, from their own use of the theory in other circumstances, but sources said it will slow down what HUD can do under disparate impact until the Supreme Court issues a ruling on a similar case before it.

As another observer notes, it also boosts the morale of lenders, trade groups, and others that have been fighting the theory over the past few years. While HUD will likely appeal the decision, the fact that the same issue is before the SCOTUS and that arguments on that case are likely to be heard early next year means that HUD's pursuit of the appeal, and use of the theory in other instances, may be deterred.

Judge Leon's opinion was, to say the least, unvarnished.

As is typical for Leon — who often issues strongly worded opinions — the judge blasted the use of disparate impact, saying the Fair Housing Act "only" prohibits disparate "treatment," or intentional discrimination. Responding to an argument by the government that his court was precluded from weighing in on the use of disparate impact, Leon replied, "Please!"

"The expansion of FHA to include disparate-impact liability would not only have wide-ranging disruptive effect on the pricing and provision of homeowner's insurance, but would also require insurers to collect and analyze certain types of race-based data on their clients and prospective clients," Leon said in the final opinion.

He added that the case was "another example of an administrative agency trying desperately to write into law that which Congress never intended to sanction."

That has been the story of the life of the banking industry since January 2009.

Witkowski also points out that Judge Leon's decision, and the case pending before the Supreme Court, involve the Fair Housing Act. The CFPB has been using disparate impact to push claims under the Equal Credit Opportunity Act. Therefore, a decision against disparate impact under the Fair Housing Act doesn't necessarily apply to actions by the CFPB under ECOA. However, what such a ruling would likely do is encourage victims of CFPB's overreach to fight back, with the legitimate hope that they will ultimately prevail. Personally, I would love to see the CFPB continue to paint a bulls-eye on the forehead given the change in contol of Congress effected yesterday. The more examples of stained theories used to push ideological social engineering goals, the more reason for concerted action by Congress to put actual oversight on The Adjustment Bureau, and the more likelihood that wing-clipping will occur, even if it has to wait for a change in the White House in January 2017.

Culture wars aren't won overnight. Banks are in it for the long haul.

CFPB Delenda Est!

Coakley's Special Friend

Massachusetts Attorney General and wanna-be governator, Martha Coakley, has tried to make political capital out of her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, over their policy of refusing to permit the sale of houses to non-profit organizations who intend to resell the home to the borrowers who have defaulted on the loan secured by a loan that is owned by Aunt Fannie or Uncle Freddie. We last discussed the lawsuit in June.

While Martha has publicly trotted out one of the nonprofits involved in this scheme as a paragon of virtue and the Plantonic ideal form of nonprofit rectitude compared to which all other nonprofits are merely a pale reflection, some investigative reporting has uncovered the fact that the CEO of said nonprofit is a campaign contributoer to Ms. Coakley.

Massachusetts Attorney General Martha Coakley stands accused of failing to disclose close ties between her gubernatorial campaign and a nonprofit that’s at the center of the State of Massachusetts’ lawsuit against the Federal Housing Finance Agency, Fannie Mae and Freddie Mac over buyback programs.

According to a new report in The Boston Globe, Elyse Cherry, the CEO of Boston Community Capital, is the co-chair of Coakley’s campaign finance committee.

Cherry’s Boston Community Capital is also the focus of a lawsuit filed by Coakley against the FHFA, Fannie and Freddie, which alleges that Fannie and Freddie, currently under FHFA conservatorship, are refusing to comply with the Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

One of the provisions of the law, which was passed in August 2012, prohibits creditors from blocking home sales to non-profits simply because the non-profit intends to resell the property back to the former homeowner.

In the lawsuit, filed in June, Coakley said that these foreclosure buybacks are exactly what the GSEs are preventing by refusing to engage in the buyback program.

When Coakley filed the lawsuit in June on behalf of the State of Massachusetts, she specifically cited Boston Community Capital’s Stabilizing Urban Neighborhoods Initiative as an example of how the Massachusetts buyback program can work.

[...]

But according to the Globe report, Cherry hosted a Coakley fund-raiser mere days before the lawsuit was filed.

From the Globe report:

Though Cherry’s work has drawn high-profile supporters, Coakley’s lawsuit is drawing criticism from a prominent affordable housing advocate who opposes Cherry’s approach and a government ethics champion who says Coakley should have disclosed her ties to Cherry to avoid the appearance she’s doing favors for insiders.

“It’s important that the public knows about private dealings that could potentially affect government action,” said Pam Wilmot, executive director of Common Cause, a nonprofit group that promotes transparency in government.

Coakley said there was no need to file a public disclosure with the State Ethics Commission since Cherry’s $3,250 in state donations to Coakley since 2005, the $1,500 she gave to Coakley’s failed US Senate bid in 2010, and the $5,000 she donated to the Democratic State Committee in September are already matters of public record.

One of the interesting aspects of the criticism of the Cherry-Coak(ley) connection is that much of it is coming not from the Titans of Wall Street, The Top 1%, or Darth Vader, but from folks who you would think would be rising to Coakley's defense. Among these critics is a guy who usually considers no bar is too low to limbo under, as long as the result of dancing under it is the infliction of pain on a lending institution.

Bruce Marks, a longtime housing advocate and chief executive of the Neighborhood Assistance Corporation for America in Jamaica Plain, saidthat Cherry’s buyback program is flawed because Boston Community Capital buys foreclosed-upon homes at a discount from lenders, but doesn’t pass along all the savings to families that were foreclosed upon. Instead, her group typically boosts the resale price by at least 25 percent, Boston-area property records show.

Marks cites Coakley’s yearly salary, $590,000 in 2013, as evidence that she “paints herself as this advocate for the consumer, and it’s the opposite.”

Marks also said that BCC makes money on each home refinance it conducts because BCC marks up the home by 25% above the price it paid to the lender when BCC resells it to the homeowner. According to Marks, borrowers must also bring approximately $5,000 in fees to the closing.

Marks said that BCC charges an interest rate 6.375% for the loans it gives to the previously distressed borrower, which is two percentage points more than what BCC pays for the money it borrows to make the loans.

“If a bank was doing that, you’d charge them with predatory lending,” said Marks, who said his group collects a small fee from banks to help homeowners negotiate a reduced mortgage payment with their lenders.

A two percent spread is predatory lending? C'mon Bruce! Even your running buddies in Havana wouldn't drink that vat of Kool-Aid.

While I doubt that in the Peoples Commonwealth of Massachusetts this particular kerfuffle, standing alone, will cost Martha the governor's crown, the race against Charlie Baker is currently neck-and-neck. When your opponents and a good portion of your supporters gang up to publicly question your conduct on ethical grounds shortly before early voting starts, you're not doing yourself, or the lawsuit that you're waging as much through press releases as through motions and briefs, any favors.

More Adventures In Consumer "Protection"

The CFPB's gossip column (which we've previously blasted) got a recent fisking from George Mason University scholars Hester Peirce and Vera Soliman. They point out several inconvenient truths about The Adjustment Bureau's plan to expand the scope of a public rag sheet where anyone and his second cousin Luigi can anonymously lambaste, in narrative form, any financial business in the Milky Way with unverified snark of various flavors. You know, just like what we like to do here at Bank Lawyer's Blog.

Peirce and Soliman make the following criticisms:

• There is not a market failure that would justify the public database (it's a solution in search of a problem). "There may be a powerful consumer demand for sharing bad experiences, but a private complaint database provider can more effectively satisfy that demand."
• It's a costly enterprise whose purported value does not justify the added expense.
• "By publishing a database of unverified, redacted (to remove personally identifiable information) consumer complaints, the Bureau would entice consumers to rely on incomplete and potentially inaccurate information—exactly the type of practice the Bureau seeks to stop financial firms from engaging in."
• Financial institutions will suffer financial harm from unverified complaints that they cannot effectively rebut, given the ridiculously short response time (15 days) and inability to publicly identify the accuser.
• The Bureau lacks legal authority to establish the database.
• The Bureau's argument that other agencies publish similar databases lacks argumentative "heft." "[B]ad practices at one agency do not justify bad practices at another." Moreover, some of those databases provide protections regarding verifiability that the Bureau's will not.

Based upon the CFPB's initial responses to comments it's received about the proposal, don't expect the CFPB to back down from this bad idea. After all, the CFPB has been fairly clear in recent public pronouncements that while technically it's mandate may be to prevent and remediate "unfair, deceptive or abusive" practices, what really revs its engine is "improving customer service." It's not enough to prevent fraud. The Adjustment Bureau is all about improving the "quality" of customer service. It doesn't believe that the free market can adequately manage that aspect of an agenda that requires that life be hassle free, at least if you're not a financial institution. From that perspective, a government-sponsored consumer gossip column makes all the sense in the world.

The Stickiness of Browsewrap

A recent client alert from Arent Fox discusses a potential problem for every bank that has a website, which, I assume, means almost every bank. A decision of the US Ninth Circuit Court of Appeals held against Barnes & Noble, which attempted to force a customer to abide by the alternative dispute resolution terms that were contained in B&N's "terms of use" (TOU) that governed the use of its website. Visitors to the website are notified of the existence of the TOU through a highlighted "hyperlink" at the bottom of the website's homepage (you can view B&N's homepage here and scroll to the very bottom of the page, left-hand corner, to see the link). The TOU also appeared, underlined and in different colored font, at the bottom of each web page that the customer used during the check-out process. According to the court, that wasn't sufficient notice of the TOU, at least not sufficient to bind a consumer to the binding arbitration provisions.

It then went on to explain that, in situations where a website owner wishes to bind a user to the terms in a browsewrap agreement, “the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract” and that, in turn, “depends on the design and content of the website and the agreement’s webpage.”

[...]

In fact, the Ninth Circuit explicitly held that making the Terms of Use available for review via a conspicuous hyperlink is insufficient to create constructive notice:

[W]e therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on — without more — is insufficient to give rise to constructive notice. While failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract … the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.

The author of the client alert, Dana Finberg, thinks that the implicit lesson of the decision may be that "browsewrap" TOU agreements may have to adopt many of the features of "clickwrap" TOU agreements (where the customer actually has to give affirmative consent to having read and agreed to the terms by "clicking" a "I Agree" button or via a similar process), "at least as to individual consumers using commercial websites."

Obviously, using a "clickwrap" process, whereby all visitors to a bank's website, before they can use it, must affirmatively consent that they agree to the website's TOU, is the legally safest method of ensuring enforceability. It's also a process designed to discourage customers and potential customers from using the website, which is why most banks and other businesses don't use it (see, as only one example, Chase Bank's website's homepage, where the TOU is buried at the bottom of the page and not even highlighted).

A middle ground might be to draw the reader's attention to the TOU by other means, such as content that explicitly states that the use of the website is subject to the TOU and that draws the reader's attention through size, color, and/or other variations from the other content. At the very least, the business must consider the risks of using browsewrap rather than clickwrap agreements for its TOU, and consider the impact of those risks on the content of the TOU. For example, should binding arbitration provisions ever be contained solely in a TOU that is presented to a consumer solely as a "browsewrap" agreement? What other processes might make sense to ensure the enforceability of such critical terms? Should separate processes be used with respect to agreements with web site users who are not customers and web site users who are customers?

Are we having fun yet?

HMDA Data Drill-Down

Attorney Warren Traiger thinks that the proposed CFPB changes to HMDA will be "a
fair lending game changer" (paid subscription required).

Information that is currently proprietary, like applicants' credit scores and debt-to-income ratios and loan fees and interest rates, will now be shared annually with the CFPB and other regulators. The proposal will also allow regulators and potentially the public to analyze mortgage lending practices by applicants' age as well as by race, ethnicity and sex.

[...]

Regulators will no longer need to wait until examination time to assess a lender's compliance with the anti-discrimination laws, since they will have annual access to a panoply of sensitive data from almost every mortgage lender. Agencies will be able to routinely crunch and compare data from across the industry and in any geographic area.

Moreover, it may be only a matter of time until the enhanced data becomes public. While the CFPB has delayed consideration of what data should be released, its proposal states that "public HMDA data [should] be modified only when the release of the unmodified data creates risks to applicant and borrower privacy interests that are not justified by the benefits of such release to the public." In other words, protecting the privacy of mortgage applicants will be the only limit on how the data is released.

Warren warns that what all this looks like is a replay of 1991, when the initial release of HMDA information ignited a firestorm of "fair lending mortgage litigation and regulatory enforcement actions that continue unabated to this day." In the past, at least lenders could argue that raw data of discrepancies in loan denials between ethnic, racial, gender or age groups could not alone prove discrimination because of a lack of "control variables." Warren contends that the additional data regarding the credit profile of applicants and details of the mortgaged property will make it harder to make the argument that there are a lack of "control variables." Obviously, that's the intent of the new requirements, which are mandated by Franken-Dodd.

Warren suggests that lenders use the expected interval until the effective date (expected to be January 1, 2017 to run the numbers using the new categories to see if they show disparity in approval rates, do some digging into the story behind the numbers with respect to any disparities shown, and change training, underwriting, or other practices to correct any potential problems before the regulators or a class action lawsuit beats you to the punch. He omits prayer as a potential course of action, which I assume is the result of secular humanist bent of the American Banker, the trade publication in which his opinion piece was published last week. He also omitted one of my favorite remedies for all things even tangentially related to the CFPB: get out of mortgage lending and consumer financial products and services altogether. Unless, of course, you like feeding the families of class action trial attorneys, regulatory enforcement lawyers, and those "saints-in-the-making" at the CFPB who might not be able to define "abusive" with any degree of precision, but, as with pornography, know it when they see it.

Read My Lips: "No Targeted Businesses"

Apparently suffering from an attack of sudden-onset common sense, the FDIC issued revised guidance last week on payment processor relationships that eliminated the concept of "targeted businesses" that the FDIC considers to present a heightened risk of consumer fraud. As we disccussed in January, among the "targeted" companies were not only the usual suspects, like payday lenders and telemarketers, but such head scratchers as online dating services. We assume that the FDIC was shining a spotlight on illegal "escort services" that often act as a front for prostitution, but in its customary "why use a jeweler's awl when a sledgehammer will do" approach, it cast a wide net around otherwise legal businesses.

In its press release accompanying the revised guidance, the FDIC accused the rest of the world of failing to grasp its nuanced approach to making the world safer through social engineering.

The lists of examples of merchant categories have led to misunderstandings regarding the FDIC's supervisory approach to TPPPs, creating the misperception that the listed examples of merchant categories were prohibited or discouraged. In fact, it is FDIC's policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law. Accordingly, the FDIC is clarifying its guidance to reinforce this approach, and as part of this clarification, the FDIC is removing the lists of examples of merchant categories from its official guidance and informational article.

Apparently, bankers are too dense to understand the FDIC's guidance's "original intent," and so, like Antonin Scalia does with US Constitution, the FDIC issued "Payment Processor Relationships For Dummies" so that the Alfred E. Neumans among the proletariat would finally get it through their thick skulls that the FDIC will not, ever, tell you in advance that a line of business is problematic. Instead, they'll wait until your next examination and then bitch-slap you for serving any members of the "non-targeted" group. That way, Jeb Hensarling can't smack them on the behind like a non-housebroken puppy with a rolled-up copy of their written "guidance" (which, as the FDIC repeatedly asserts, is "not binding like an actual regulation"). It's the way of the regulatory world in the era of "All Fired Up! Ready to Go!"

We're sure that the fact the previous version of the guidance that listed targeted businesses provided one of the bases for the lawsuit filed against the FDIC, OCC, and FRB in June by payday lenders and a trade group had absolutely nothing to do with this recent "clarification." Perish the thought!

In response to to all of this, I echo the immortal sneeze of John "Bluto" Blutarsky.

Alleged "Overcharger" Settles

Almost one year ago, we discussed an investigation by the Colorado Attorney General into the alleged inflation by foreclosure attorneys of certain foreclosure costs, and, subsequently, allegations of more widespread falsification of fees and costs by attorneys handling foreclosures in Colorado. At the time, I expressed the view that if there was anything to these allegations,"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."

Last week, the Denver Post reported that at least one of the firms involved in the scandal had decided to haul itself out of the deep water by paying beaucoup bucks to settle with the State of Colorado and with class action attorneys.

Tens of thousands of Coloradans whose homes were foreclosed on since 2009 by law firm Aronowitz & Mecklenburg will share in a massive class-action lawsuit settlement over allegations the lawyers regularly inflated fees that homeowners were forced to pay to save their house.

The settlement, on paper since April but only now getting court approval, comes just days after the Denver law firm agreed to a separate $10 million deal with state investigators to settle an investigation into the same alleged misconduct.

The law firm — owned by Robert Aronowitz, his daughter, Stacey Aronowitz, and her husband, Joel Mecklenburg — is to dissolve in the next six months, according to terms of their settlement with the Colorado attorney general's office.

But not before the firm pays back roughly $2.5 million to more than 32,000 families — money the lawyers allegedly overcharged for the posting of legal notices in the cases.

The law firm denies it did anything wrong, but agreed to the settlement to avoid costly litigation, according to a copy of the 164-page document filed in Denver district court.

"Avoiding costly litigation." Are they worried about their own counsel padding, churning, or upcharging? Just wondering.

Before becoming misty-eyed over how damaged homeowners will now be made whole, pay attention to how the $2.5 million is being divvied up.

Those affected in the Aronowitz settlement should see a check ranging from $20 to $225 in the next couple of months, depending on which of three classes they belong to. Postcards have been mailed advising homeowners of the settlement.

Some people might get more than one payment, such as those who cured more than one foreclosure, even on the same house.

The lawsuit's plaintiffs — Rodrick Kemp, Linda Donna, Richard Lemesany, and Martin and Michaelie Wingo — each are to receive an additional $10,000, though the Wingos will share that amount. Another $875,000 will be paid to cover legal fees.

[...]

The three classes and the payouts include:

• Homeowners who paid a county public trustee what they owed on a mortgage, including the lawyers' fees, and stopped the foreclosure process, known as a cure. They will get $225 per foreclosure;

• Those who stopped a foreclosure through a loan modification. They will receive $100 only if they opt-in on the settlement, up to a maximum $1.1 million to be paid out for all;

• Homeowners who lost their house to foreclosure auction for a price that was less than what they owed. They will receive $20 per foreclosure.

Investors who purchased properties at county foreclosure auctions are not covered by the settlement because they were not plaintiffs, although they also were required to pay the lawyers' bills, which included the posting costs.

Also not covered by the settlement are other fees the attorney general alleges were overcharged, including up to $100 for a one-page document, called a "statement of qualified holder," that purportedly takes seconds to fill out.

Expenses charged for the filing of nonexistent Rule 120 lawsuits, revealed by The Post last year, also are not part of the settlement.

By accepting the payments, homeowners cannot sue for any other charges they might have overpaid in the foreclosure.

Aronowitz's $10 million settlement with the attorney general will be used largely to cover legal fees in the case and future consumer education. Only a few homeowners with current foreclosure cases are to be reimbursed.

Yes, once again,members of the "class" get peanuts and the big winners in both cases are the plaintiffs' attorneys. Sure, the few named class action plaintiffs get $10,000 each, but the class action plaintiff's lawyers get 80 times as much. The rest of the allegedly adversely affected borrowers get between $20 and $225.

In fairness, it appears that if there was wrongful conduct (and the law firm that settled has neither admitted nor denied that fact), it has been "deterred," at least with respect to the settling law firm. According to the Post, the settling law firm is going to be "dissolved," although I've read other reports that suggests that it may be sold rather than liquidated. It will be an enterprising buyer who would buy that firm's business, especially in light of the fact that the residential foreclosure heyday is long past. Then again, Colorado has legalized recreational marijuana use, so there's always hope.

The other two accused firms have decided to slug it out. Apparently, paying their own trial attorneys is not yet a sufficient inducement to lead them to pay off the plaintiffs' counsel and the state to just go away and leave them alone.

The American litigation system: everyone wins, as long as "everyone" is a trial lawyer.

CFPB Proposes To Establish "Gossip Column"

As part of its ongoing effort to destroy the private business of banking in a free market economy and substitute a federal government-directed banking system better serve the consumers it was created to protect, the CFPB has recently proposed to have consumers who submit complaints to the CFPB to also submit a narrative of the complaint, all of which, together with a written response from the financial institution that is the subject of the complaint, would be included in the CFPB's publicly available Consumer Complaint Database. Why? Glad you asked.

These first-hand accounts would make the database more useful by providing more context to the complaints, and allowing the public to see if a problem is an isolated incident or part of a bigger trend in a certain geographic area or a particular company, the bureau contends. Plus, more details about complaints would help consumers who are considering a certain financial product or service make better decisions, according to the bureau.

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The bureau also hopes that these narratives would serve as an additional incentive for businesses to address problems with their financial products or services and “more vigorously compete over good customer service.”

“The consumer experience shared in the narrative is the heart and soul of the complaint,” said CFPB Director Richard Cordray. “By publicly voicing their complaint, consumers can stand up for themselves and others who have experienced the same problem. There is power in their stories, and that power can be put in service to strengthen the foundation for consumers, responsible providers, and our economy as a whole.”

In addition, what red-blooded American doesn't love a public bitch-fest, especially one available over the internet? OK, maybe Cardinal Dolan doesn't, but most of us can't wait to hear about how Betty Lou got hosed by Citibank cutting off her credit card solely because she overdrew her credit line five days in a row at "Crunchy Munchie's" pot shop in downtown Denver. She simply forgot she used it yesterday, and yesterday kept turning into today, which turned into tomorrow, and baby, that was one powerful batch of hash marshmallow parfait! And the really amazing part was that they charged her credit card in what is an all-cash business. How rad!

As data wonk Bob Hayes discussed a couple of years ago at a Federal Reserve Bank forum on the CFPB's credit card complaint database, the ABA and other banking mouthpieces aren't crazy about a federally sponsored "gossip column" whose reliability has yet to be proved. While Bob agreed with such critics that more research regarding the validity of complaints is in order, he also contended that "[t]he current analyses, however, suggest that the CFPB credit card complaint database provides clear, reliable and valid information for banks about their credit card practices."

The CFPB's proposal is open for public comment for 30 days. Bank's that have concerns about the issue can, of course, submit their objections to The Adjustment Bureau. However, as The Dallas Business Journal's Kent Hoover dryly notes, "it doesn’t look like industry complaints will have much influence on the bureau." I think that's a safe bet.

What bankers can look forward to once this process takes full flight is what the CFPB and their primary federal bank regulators will do with the "narrative" bashings banks are surely going to suffer. We all know that "reputational risk" is a term the regulators have fallen in love with these days. It's such a squishy term that it can form the basis for a safety and soundness violation any old time a regulator wakes up on the wrong side of the bed. Just wait until the public complaint "narratives" start forming the basis of informal, or even formal, enforcement action. The CFPB will call that "validation."