Bank Lawyer's Blog

The Fair Lending Extortion Racket Runs On

The law firm of King & Spalding recently highlighted a problem that we last discussed eighteen months ago, and, since then, has only gotten worse.

Cities and counties that have experienced increased foreclosure and vacancy rates in the aftermath of the housing market crash of 2007-2008, perhaps emboldened by recent court decisions, have recently filed several new “predatory lending” cases under the federal Fair Housing Act (“FHA”) against financial institutions. In the last six months, for example, Los Angeles, Miami, Providence, and Cook County, Illinois, have filed lawsuits under the FHA against a variety of mortgage lenders to attempt to recover lost property tax revenues and other damages.

The cases allege either traditional redlining (excluding minority areas from lending activity) or "reverse redlining" (targeting minority for subprime, Alt-A, and other high-cost loans). As is the rage these days, the plaintiffs use the doctrine of "disparate impact" to undergird their claims of violation of the Fair Housing Act. The authors allege that decisions of federal district courts that refuse to dismiss the lawsuits, as well as the settlement of the Mt. Holly case  before the Supreme Court could hear oral arguments (much less decide it), have emboldened cities and counties to pursue these claims. Of specific import are recent decisions of a federal district court in lawsuits filed by the City Los Angeles against Wells Fargo and Citigroup, in which the judge held that the Sixth, Ninth, and Tenth Circuit Courts of Appeal have all determined that "disparate impact" under the FHA is a viable theory. As K&L Gates also discussed not long ago, the Fifth Circuit recently applied HUD's "disparate impact rule" in a fair lending case.

The settlement of the Mt. Holly case is cited by both firms as a setback for lenders and an encouragement for municipalities that want to blame mortgage lenders for their broken neighborhoods. That's not because the theory of "disparate impact" in fair lending cases is likely to be upheld, ultimately, when the US Supreme Court finally gets a chance to decide the issue (and there are powerful arguments against the application Of the theory to the FHA), but because of the obvious problem we've repeatedly noted: these cases, being based on sophisticated statistical analyses that require high-priced consultants and attorneys, are expensive for the defendants. We'd love to see them slug it out to the bitter end and to never settle, because, as King & Spalding concludes, settling questionable claims only encouirages more questionable claims. However, the best business decision for a specific insitution may very well be to pay off the plaintiffs and put the matter behind them. At least, until the next busted pesthole of a city decides to blame decades of mismangement, high taxes, and anti-business laws and regulations manned by sometimes-corrupt bureaucrats, entirely on lenders who are not themselves pristine.

On a positive note, the more the City of Los Angeles sues businesses, the more California-based businesses become Texas-based businesses.

A Distinct Lack of Interest

In a think piece in yesterday's American Banker, attorney Michael Reyen discusses that fact the City of Richmond, California's "Seize The Mortgage" plan through the use of eminent domain has been stymied by the failure of the plan's supporters to obtain the supermajority approval necessary to obtain City Council approval to move forward with the half-baked scheme. As a result, its supporters are trying Plan B: partnering "with another community to form a joint powers authority and carry out the plan."

To date, it has not had any takers.

Why not? According to Reyen, because other municipalities fear (rightly, in my opinion) the costs and risks of litigation, and because the FHFA has threatened to pull Uncle Freddie and Aunt Fannie out of any municipality that starts seizing mortgages through such a means. As to litigation, although a federal court dismissed a lawsuit filed by mortgage loan securities trustees, the court did so "without prejudice." In other words, the issue was not yet "ripe," but if Richmond proceeds to actually implement the plan, "ripeness" will permeate the air like the scent of a thousand dead armadillos in the middle of an Amarillo blacktop in mid-August.

The negative reaction of the FHFA and mortgage securities investors would be even more consequential over the long haul.

The FHFA has stated that it may initiate legal challenges against any local or state government that sanctions the use of eminent domain to restructure mortgage loan contracts in a way that affects FHFA’s regulated entities, Fannie Mae and Freddie Mac. It has also said that it may act by order or regulation to “direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” This amounts to a death sentence for residential mortgage lending in any municipality in which the FHFA limits, restricts or ceases business activities.

Notwithstanding these "strong headwinds," Reyen thinks that the idea is not yet dead, and cites the interest of Irvington, New Jersey, in pursuing the scheme. In my view, the headwinds will only become stronger if these plans move forward. In addition, as the economy continues to improve and real estate values eventually recover, the "need" for such "creative" measures to assist underwater borrowers will be harder to justify. That won't stop true believers from believing in it, but it may finally crater any practical chance of any such plan being seriously pursued to the point of "ripeness."

Martha Makes Good On Her Threat

Well, Martha Coakley gave Mel Watt only a couple of weeks to fold, and when he didn't, she made good on her threat to sue the FHFA.

Coakley followed up on her threat of litigation and filed a lawsuit against the FHFA and the GSEs in Suffolk Superior Court. The complaint 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. Coakley says these foreclosure buybacks are exactly what the GSEs are preventing.

[...]

In the complaint, Coakley alleges that two of the FHFA’s policies violate state law. The suit alleges that Fannie and Freddie’s “arm’s-length transaction” policy prohibits property sales to non-profits who resell to the original homeowner.

The suit also alleges that the GSEs “make whole” policy has the same effect, as it prevents Fannie and Freddie from accepting anything less than the outstanding loan amount from the former homeowner or anyone seeking to resell or rent to the former homeowner.

Fannie and Freddie are in conservatorship because too many borrowers haven't repaid mortgage loans that Fannie and Freddie bought and packaged into mortgage backed securities that they then sold to investors, including, among other types of entities, pension funds that thought they were buying a safe, "government-backed" investment. The FHFA, which regulates those two entities, has a duty to the investors (and to Fannie Mae's shareholders, who've been shafted by the government's refusal to stop sucking up all of Fannie's profits, even though all of the government bailout money spent on Fannie and Freddie has been repaid in full) to try to recoup the maximum amount possible from the mortgages that it holds. Not letting defaulting homeowners benefit from a less-than-full-repayment liquidation of a loan makes sense from that policy standpoint.

Coakley believes that state legislation that pushes local economic recovery goals (or homeowner relief social policy goals, depending on your perspective) should be able to trump the policies of the a federal regulator regarding two wards of the federal government. This will be an interesting piece of litigation from the perspective of whether or not the FHFA must amend its policies to comply with such a state law. I don't see any upside for Watt to compromise on the current policies until a court tells him he has to back off and comply with Masschusetts law. At that point, he can tell the investors and shareholders that he had no choice: the judge made him do it.

It's also interesting from the standpoint that Watt and Coakley appear to be on the same side of the fence when it comes to social policy. Watt was a liberal Democrat when he was in the House of Representatives. Moreover, he recently gave a speech that indicated that Fannie and Freddie were going to expand their efforts to provide financing to borrowers with less-than-pristine credit. That was a move that caused a blinding flash of "deja vu all over again" to appear before the eyes of critics of the federal government's housing finance policies that many allege led to the subprime housing bubble and the resulting 2008 economic collapse. However, it was also an indication that rather than winding down Fannie and Freddie and creating a different sort of national residential finance market (which was where we seemed to be heading under Watts predecessor, Ed DeMarco), we may be back on the road to officially re-establishing the two mortgage finance giants as the only game in town, something they've unofficially been since the collapse occurred (and prior to that time, to be honest).

Regardless of the way Coakley's lawsuit plays out, we have the sneaking suspicion that the brave new world of residential mortgage finance may look like the brave old world.

Disparate Impact Ate My City

Another broken city, buried under a mountain of economic malaise caused by its own mismanagement, is attempting to blame its woes on a big bank, and, in the process, squeeze some money out of it.

The city of Providence, R.I., is suing Santander Bank in federal court claiming the bank has refused to make prime home loans in minority neighborhoods.

[...]

The city is claiming that Santander, a Spanish banking giant with U.S. headquarters in Boston, deliberately cut back on lending to qualified homebuyers in minority neighborhoods in recent years while increasing mortgage lending in predominantly white areas.

[...]

Providence alleges that Santander has followed a pattern of discrimination across its New England footprint. The lending declines, the city says, are not the result of economic conditions. While Santander mortgage originations in minority neighborhoods fell, other banks, including Citizens Bank, made home loans in much greater numbers in the same areas.

Such practices, dubbed 'redlining' over allegations that some lenders used red highlighters on maps to outline off-limits neighborhoods, violates the federal Fair Housing Act as well as the Equal Credit Opportunity Act. Providence is demanding a jury trial and is seeking an injunction against Santander as well as unspecified compensatory and punitive damages.

“We categorically reject this accusation and will vigorously defend ourselves against the legal action," Santander said in a statement. "However, we are willing to work with the City of Providence to allay its concerns."

In other words, "we we'll pay blackmail, as long as it's not exorbitant."

This suit is based on the same "disparate impact" theory that the Department of Justice, HUD, and various municipal nirvanas like Cleveland and Baltimore have been using to offer misdirection to the fact that, as I once put it so amiably, "[c]rime, poverty, high taxes, a business-unfriendly environment, a lack of cohesive vision for the future and the will to implement that vision even if it existed, all might have had something to do with" each city's current woes. The fact that the municipalities are being kicked out of court on the issue of causation doesn't deter them. After all, it's the taxpayer picking up the tab.

In a recent article in the American Banker (paid subscription required), lawyers Valerie Hletko and Ann Wiles discuss the potential impact on disparate impact lawsuits filed by municipalities, of the US Supreme Court's decision Lexmark International v. Static Control Components, which doesn't address disparate impact but, nevertheless, throws a giant monkey wrench into the gears of this litigation juggernaut. According to Hletko and Wiles, "the court held that, in order to have standing to sue under a federal statute, a plaintiff must fall within the statute's 'zone of interest' and also show 'proximate cause.' In other words, a plaintiff's injury must flow directly from a violation of the statute, and the plaintiff must be the party Congress wanted to protect in enacting the statute."

The Supreme Court said in Lexmark that the Lanham Act's stated purpose of preventing injury to a commercial interest in reputation or sales requires "no guesswork." Nor does the FHA's. The FHA's statement of purpose is "to provide, within constitutional limitations, for fair housing throughout the United States." It protects integrated housing patterns and persons discriminated against in housing transactions on the basis of race, color, national origin, religion, sex, familial status and disability. It does not protect the tax receipts of municipalities.

Justice Antonin Scalia's 9-0 opinion acknowledged that the Supreme Court's earlier standing discussions now look "misleading" in light of Lexmark. While Lexmark has yet to be applied to the FHA, this higher standard is likely to eviscerate standing for a range of theories of liability. While banks will have to wait for another disparate impact case to make it to the Supreme Court for a ruling on whether disparate impact claims are viable under the FHA at all, they may now avoid FHA disparate impact claims brought by plaintiffs alleging daisy-chain standing well outside the statute's zone of interest.

I don't know whether Santander is going to roll over and play dead or come out swinging. If it takes off the gloves, one of the first punches thrown has got to be based on the Lexmark decision.

Martha Tries A Carrot And A Stick On Mel

I'm not sure what Massachusetts Attorney General Martha Coakley thinks she's going to accomplish by simultaneously sweet-talking and threatening Mel Watt, but I doubt she's doing much more than engaging in political theater. Maybe she's setting herself up for a run for higher office and wants to make sure that the next time around, she doesn't get a butt-kicking like Scott Brown unleashed on her four years ago.

Massachusetts Attorney General Martha Coakley reiterated calls Wednesday for the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to offer principal reductions to distressed borrowers and to participate in nonprofit home buyback programs.

Coakley sent a three-page letter to FHFA Director Mel Watt trying to persuade him that principal reductions could be crafted in such a way to prevent abuses, including what she called "the abstract fear of waves of strategic defaulters."

"Abstract fear"? You'd think that folks like Coakley, adherents to utopian progessivism that denies the reality of human nature and proposes that through the exercise of centralized state power, human beings can be perfected and justice achieved, here on Earth, would know all about "abstract fears," as well as "abstract joys," "abstract hope," and "abstract abstractions."

Nevertheless, in case the risk of strategic defaults might actually be grounded in reality, Coakley had an answer for Watt.

Coakley said one way to reduce strategic defaults would be to adopt clear modification underwriting standards, require a showing of hardship by the borrower and allow lenders to share in the home price appreciation.

Watts' predecessor, Ed DeMarco, adamantly opposed principal reductions. He felt that whole-sale principal write-downs would hurt mortgage bond investors which, in turn, would hurt Fannie Mae and Freddie Mac, which, in turn, would hurt the mortgage market. Coakley apparently thinks Mel is more sympathetic to a state chief law enforcement officer's sojourn into social policy, especially in the area of mortgage markets, where everyone knows a state attorney general is uniquely qualified to offer business-savvy solutions to thorny problems.

In case Mel is inclined to turn a DeMarco-like deaf ear to her entreaties to do the right thing, Martha whipped a big stick out from behind her back and threatened Mel with a beating if he didn't fall in line.

In the letter, Coakley even threatened to take legal action because the FHFA has refused to take part in buyback programs that allow nonprofits to purchase distressed homes at current market value and immediately resell them to the former homeowner.

"Our office also is considering all available legal avenues—including litigation—to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow the GSEs to participate in credible buyback programs," Coakley wrote.

Coakley is using as the basis of her threats the alleged violation by Aunt Fannie and Uncle Freddie of a 2012 Massachusetts law that forbids lenders from refusing to consider buyback offers at "fair market value" solely because the home will eventually be returned to the defaulting homeowner. I assume that DeMarco and Watt believe that a law that vague is likely to be held to be unenforceable against Fannie Mae and Freddie Mac, or perhaps they've just decided to become renegades and ignore the law because they take some perverse pleasure in lawlessness. I'm betting on the former, but I might be wrong.

At any rate, Watt hasn't publicly responded to Coakley (or if he has, the main stream press hasn't reported it). I wouldn't hold my breath waiting for the FHFA to cave on this one, although Watt is relatively new in the saddle, and you can't be sure which way he might ride. My guess is that Coakley will have to push her social engineering agenda in court. Pursuing it against a cash cow like the FHFA, which, with its charges in federal conservatorship, is not likely to be scared by the prospect to spending money on trial lawyers.

Fannie Slams The Door Shut

Alleged shenanigans in foreclosure proceedings by lenders' counsel in Colorado, which we've previously discussed here and here, have prompted some serious consequences for two of the law firms fingered in the investigations.

Fannie Mae is not going to send its foreclosure business to two specific law firms in Colorado, effective immediately, the government-sponsored enterprise can confirm.

"Fannie Mae has instructed servicers to cease referrals of new foreclosure cases to Aronowitz & Mecklenburg and the Castle Law Group and to transfer existing cases at those law firms to other firms," said Fannie Mae spokesperson Keosha Burns.

The GSE would not comment on why it so suddenly terminated its relationship with both firms.

As discussed in the previous posts, the Colorado Attorney General's office has been investigating whether the firms inflated costs of foreclosures, either directly or theough the use of captive service firms. The fact that Aunt Fannie would suddeenly drop the bomb on two law firms that handle the majority of its work in Colorado may be an indication that some action from the AG's office is forthcoming and the state regulator gave Fannie Mae a heads-up. If so, the results caused loan servicers in that state some heartburn.

The GSE's decision apparently caught more than a few servicers off-guard this week, and some were scrambling yesterday and today to find additional available legal counsel in the state, HousingWire was told by sources that wished to remain anonymous.

I'm confident that in the land of the over-lawyered, there will be plenty of sharks to eat the prey. One thing the United States does suffer from is an undersupply of lawyers.

HousingWire is one of the few trade press outlets that covers this story. As we've mentioned before, that's odd. It's got all the juicy elements fit for prime time: banks, lawyers, non-paying homeowners, large loan servicers, press-hungry state law enforcement officials: all the favorite enemies or heroes of a narrative, depending upon who's spinning the story. Yet, for some reason, certain major publications seem reluctant to jump on board. Inquiring minds want to know: "Why?"

Stay tuned. This will not be the last word on this troublesome topic.

The Unbankable Turn To The Non-Banks

The marijuana banking conundrum in Colorado may be driving banks to distraction, but it's opening up the funding business to high-cost, low-publicity private money sources.

From hard-money lenders — investors who offer short-term, high-interest loans — to publicly traded real estate investment trusts focused on marijuana clients as tenants, the lack of conventional financing has created a sector that's gaining steam and drawing stares.

They are investors with an appetite for high risk and high returns, all of it hinged on an industry that's been around for a few years — retail sale of medical marijuana has been legal since 2009, but the business began to boom Jan. 1, when recreational retail sales began.

What the new breed of lender is doing is focusing on real estate as collateral for the loans it makes to the marijuana business, which theoretically lowers the risk if the marijuana business goes up in smoke. Of course, that assumes that the business operates in accordance with state law and that the federales never exercise their legal right to seize the assets of a drug business that violates federal law. Heightened risk justifies high interest rates.

The higher-risk-higher-rates-and-fees rationale makes sense unless you're in the payday lending, deposit advance, or tax anticipation refund loan businesses where the borrower is a consumer. In that case, the regulators will be all over you for taking advantage of the fog-brained poor consumer. Taking advantage of a smoke-brained Mary-Jane business is just fine, than you very much.

Obviously, there's so much money being made in the state-legal marijuana business that businesses that need the funds can foot the higher bills. On the other hand, what choice do they have? The high-cost private money lenders are the only game in town.

It would be extremely helpful to banks in Colorado if the federal banking regulators would rouse themselves from their torpor and give soem guidance on this business. They've issued guidance in the past on such high-risk, disfavored business as subprime lending, payday lending, third-party payment processors, money services businesses, etc. All we've seen thus far is the extremely problematic FinCen Guidance that raises more issues than it resolves.

The critical risk for bankers at the moment isn't in banking "direct" marijuana businesses. It's in banking the "indirect" marijuana businesses, those that service businesses that are directly involved in the marijuana business. The business that installs and services the drying and heating units. The landscaping business that installs and services the irrigation system. The trucking company that hauls the product. The alarm company that monitors the premises. And on and on.

The FinCen Guidance, in addition to dealing only with BSA issues, mentions "indirect" banking of a marijuana-related business only in a footnote:

FinCEN recognizes that a financial institution filing a SAR on a marijuana-related business may not always be well-positioned to determine whether the business implicates one of the Cole Memo priorities or violates state law,and thus which terms would be most appropriate to include (i.e., “Marijuana Limited” or “Marijuana Priority”). For example, a financial institution could be providing services to another domestic financial institution that, in turn, provides financial services to a marijuana-related business. Similarly, a financial institution could be providingservices to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.” Whether the financial institutiondecides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.

Yeah, that clears it up. All any bank needs to do is to determine "the number of factors specific to that institution and the relevant circumstances," then go for it. No problem!

Banks in Colorado need just a wee bit more than that from regulators. Until they get it, any business that even touches a marijuana business is potentially problematic.

CFPB: Zombie Killer

Just as nature abhors a vacuum, the CFPB abhors any area of the economy where it's not rooting out evildoers and saving innocent consumers from perils they may not realize endanger them. One of the vacuums that the CFPB is rushing to fill is the land of "Zombie Foreclosures." According to National Mortgage News' Kate Berry, the CFPB sees this as the badlands where straight shooters like the CFPB need to "clean house."

Some borrowers are being harmed when a mortgage servicer starts a foreclosure but then fails to complete it, leaving borrowers on the hook for the mortgage debt, taxes and maintenance even though they may have already moved out, said Laurie Maggiano, the CFPB's servicing and secondary markets program manager.

"The CFPB is beginning to look very closely at abandoned properties and zombie foreclosures," Maggiano said Tuesday at a conference sponsored by the Federal Reserve Bank of Cleveland. "There is direct borrower harm if a borrower believes a foreclosure on their property has been conducted and they are no longer responsible, and months or years later find out that they are, that there was never a foreclosure and they have large financial responsibilities that they never knew about."

These loan servicers! They trick the borrowers into moving out of their unpaid-for homes with threats of foreclosure, and even commencement of foreclosure proceedings, then they "go dark" and, behind the non-paying borrowers' backs, let the houses sit vacant. Why do they do this? Apparently, because, like The Joker in "The Dark Knight," they believe in chaos theory, especially when they're the agent of chaos.

Do I really look like a guy with a plan? You know what I am? I’m a dog chasing cars. I wouldn’t know what to do with one if I caught it. You know, I just… do things.

Consumer advocate Peter Skillern thinks this whole gambit by loan servicers is rotten to the core.

Servicers typically flood defaulted homeowners with as many 250 letters and phone calls telling them their home is going into foreclosure, says Peter Skillern, the executive director of Reinvestment Partners, a Raleigh, N.C., nonprofit. But they usually fail to notify the borrower when the foreclosure is stalled.

"They are pushing the borrower out of the home, which results in abandonment," Skillern says. "Servicers need to make sure they are accurately communicating the status of the foreclosure process to the borrower."

Yes, so the borrowers, who haven't been making their mortgage payments, in some cases for years, can remain in, or return to, the houses "rent free" while continuing not to pay their loans. This assumes that with someone living in the house, the occupant will transform it from what the article alleges is a property with respect to which "the cost to repair a home is more than the property is worth" into a credit to the community. Even if they can't make their mortgage payments, they'll repair it. Honest.

For the last several years, we've been discussing the problem of broken cities blaming lenders for their decades of bad decision-making. The areas where homes are being abandoned by lenders are not areas that got to be in the condition they're in because of "Zombie Foreclosures" initiated by lenders who just mess with borrowers because "they just do things." Moreover, while knowingly or even recklessly initiating foreclosure proceedings or otherwise bombarding borrowers with foreclosure notices and then traveling to Neptune, never to be heard from again, would not fly with etiquette experts, the borrowers are not the only, or even the primary, folks being "inconvenienced." Unless the borrowers suddenly resume paying the freight on their mortgage loans, all that wasted effort is likely to results in costs borne by the owners of the loans (or the securities backed by the loans). If this is a problem worthy of CFPB wrath, then the investors ought to be looking into this major "abuse," as well.

Let's Be Reasonable

Attorney Ari Karin has pondered the implications of recent enforcement action by the federal government against large loan servicers, and he's drawn some interesting conclusions. Writing an opinion piece in National Mortgage News, he makes an observation that will ring true with many community bank officers and directors.

Practically, these actions suggest that as opposed to specific standards that must be met, a generalized standard of care is being developed. In other words, up to this point lenders had specific actions and goals that were required. A lender could compare its actions and performance to specific standards to determine its level of compliance.

It appears that we are witnessing the development of a generalized "reasonableness" threshold where lenders will now need to evaluate themselves based upon the processes and procedures of their competition. This obviously creates additional pressures on companies' compliance infrastructures because simply meeting minimum statutory requirements may not be sufficient in the future.

Rather, the more surrounding companies implement practices to protect consumers and avoid defaults and other problems, it could impose liability for companies lagging behind their competition. In that regard, meeting minimum statutory requirements would not be enough—lenders would need to measure themselves against their competition in regards to their compliance performance and review their own conduct from a generalized reasonableness perspective.

Put another way, a lender's compliance would essentially be viewed in hindsight, creating the need to predict possible outcomes and review them in advance to determine that their actions are generally reasonable at the time.

Reasonableness is in the eye of the beholder. When that eye is a jaundiced one, lodged in the skull of a bank regulator, what a lender might regard as "reasonable" is likely to be a world away from what the regulator views as "reasonable." Moreover, Karin's observation that judgments as to "reasonableness" will be made with the benefit of hindsight is chilling, if the judgments made with respect to many officers and directors of failed community banks constitute a taste of what lenders and servicers, bank and non-bank, provide a road map.

Looking at the most recent FDIC lawsuit against former officers and directors of a failed bank, we see that the defendants are typical of a class of unlucky former officers and directors who made commercial real estate loans, especially acquisition and development loans, during the years leading up to the Great Recession: the CEO; the senior executive officer in charge of commercial lending; and two directors who served on the bank's loan committee.

The lawsuit alleges the four recommended and/or approved commercial real estate loans and loans for land acquisition, development and construction that violated “prudent, safe and sound lending practices” and Bradford Bank’s own loan policy. Marsiglia and Mitchell served on the bank’s loan committee.

The lawsuit alleges that in seven loans from July 2006 to October 2007, borrowers were approved for loans they did not have the capacity to repay or were for amounts too high given the value of the underlying real estate. Some borrowers were approved for “speculative” land acquisition, development and construction loans “despite the known economic downturn at the time of loan approval,” the lawsuit said.

"Despite the known economic downturn at the time of loan approval." "Known" with hindsight, of course. At the time the decisions were made, they appeared to the people who made them as "reasonable." Now, we know better, don't we?

Moreover, as the former head of the FDIC during much of this mess, The Care Bair, admitted publicly, even demi-gods residing on the slopes of Mount Olympus failed to anticipate the length or depth of the downturn. Yet, with hindsight, the defendants were negligent and breached their fiduciary duties because their decisions were not "reasonable" in anticipating what "none of us saw coming."

Big loan servicers, welcome to our world. It's located on the far side of the looking glass.

As a side note: any director who decides to serve on a bank's loan committee needs to receive combat pay, a psychiatric examination, or both.

A Kerfuffle Fades To Black

The forced placed insurance kerfuffle we last discussed three years ago appears to be winding its way to an unhappy ending for loan servicers in the way many claims against loan servicers, lenders, and big businesses of all kinds end in our over-lawyered land: paying huge sums to class action palintiffs' lawyers to make them go away.

To refresh our collective memories, forced placed insurance is property insurance that loan servicers buy when the borrower fails to keep the property insured. As we discussed previously, the practice has been around for decades, and makes sense in terms of protecting the collateral for home loans when the borrower fails to do so. However, as we said in our last post, government officials and the trial lawyers who follow them like orcas in a tuna boat's wake have been worked up over certain close relationships between force placed insurance companies and loan servicers. Commission splits, referral fees, and other alleged "kickbacks" have raised the ire of the righteous, who claim that the entire arrangement is a rip off of the borrower, who ends up having a very high premium added to the unpaid balance of his debt, a premium that would not be so high if servicers weren't profiting from the misery of the deadbeats downtrodden who don't pay their insurance premiums or, in many cases, their loans.

At any rate, after wading through the sludge of civil litigation for a while, servicers are starting to settle. Wells Fargo is the latest. Not that they think that they did anything they should have been sued for, mind you.

"While we believe the lender-placed insurance purchased on behalf of these borrowers was issued in accordance with the terms of the mortgages and applicable laws, we have decided to settle these cases to avoid protracted litigation,” Tom Goyda, a spokesman for Wells Fargo, told HousingWire. “We continue to support our lender-placed insurance services, which provide continuous insurance protection for real property customers when their voluntary insurance lapses.”

They continue to believe in it, but according to Housing Wire, they and the insurance companies are paying homeowners back about 11% of the amount of premiums. That is not chicken feed. Well, for the late John Candy's chicken, it might have been, but for a normal-sized chicken it's a big bag of cornmeal. The linked article also mentions that Chase paid $300 million in a settlement, and Citigroup another $110 million. How much of that actually made it into the pockets of affected homeowners is not related. You can bet your bottom dollar that the plaintiffs' lawyers made out like bandits very well.

My sentiments on this issue haven't changed much in the past three years. As I said in my previous post:

As I've indicated in other posts, I'm no fan of many of the practices of the loan servicers. However, as is the case with loan modifications, the root cause of this particular problem becoming a problem in the first place is the fact that borrowers don't comply with the loan terms they've negotiated. They are in default of the covenant in their mortgages to keep in place homeowners insurance that protects not only themselves, but the lender. The failure to keep such insurance in place gives the lender the contractual right to obtain the force-placed insurance or, for that matter, to declare the loan in default and foreclose. You don't want the servicer ordering expensive force-placed insurance? Pay your insurance premiums.

As I also said at the time, I am more sympathetic to loan investors, since the higher costs for insurance are ultimately borne by them, especially with respect to loans that borrowers don't repay. I thought that aspect of the problem could be better handled by changes to the servicing agreements.

I realize that my sentiments appears to be that of a small minority. The majority sentiment in this country appears to be that loan servicers are all public utilities that exist not to provide a valuable service to loan owners, but to provide low-cost public services to home owners. Any attempt to make money from the process is inherently suspicious and indicates an unreformed reactionary attitude out of line with the the concepts of liberty, equality, and fraternity that ought to motivate all of the citizens of the republic as they work together for "the common good," as determined by Elizabeth Warren and her running buddies.

Under the prevailing view, these servicers are getting just what they deserve. As are the class action lawyers who sue them.