CFA News Update- February 14, 2012
The Department of Justice, HUD and nearly all the state attorneys general announced last week that they have reached an agreement in principle to settle a more than year-long investigation into so-called “robo-signing” and other servicer violations of their responsibilities to homeowners. Since the financial crisis began, an estimated 4 million owners have lost their homes through foreclosure. In late 2010, it became clear that all five of the largest servicers had engaged in short cuts and illegal use of so-called robo-signers to speed foreclosure actions against struggling owners. The agreement would settle claims by all parties against five servicers – Ally Financial, Bank of America, Wells Fargo, Chase, and Citigroup.
The key elements of the agreement are:
- At least $10 billion in servicer payments through principal reductions and other steps to modify mortgages for struggling borrowers.
- At least $3 billion toward refinancing underwater loans for struggling borrowers.
- Up to $7 billion for other forms of relief, including principal forbearance for unemployed borrowers, anti-blight programs, short sales and technical assistance. There are also special provisions for armed services members forced to sell their homes at a loss because of forced transfers.
- $5 billion in cash to state and federal governments, of which $1.5 billion will be dedicated to paying restitution to homeowners who lost their homes through foreclosure between the beginning of 2008 and the end of 2011. The remaining $3.5 billion will go to state and local governments for various activities related to foreclosures and failing home loans.
Servicers must provide these benefits within the next three years or face penalties. There are incentives for actions taken in the first 12 months after the settlement to encourage servicers to speed their processes.
The principal reductions will benefit borrowers whose loans are held in bank portfolios, or are being serviced by the lenders for investors who have agreed to principal write downs. Where one of the servicers reduces principal on a first lien where there is also a second mortgage held by another of the servicers, the latter must write down the outstanding balance of the second to the same degree.
Perhaps the most far-reaching element of the settlement is the imposition of national servicing standards that the five lenders must follow. These standards eliminate most instances of so-called “dual tracking,” where lenders initiate foreclosure actions while negotiating with consumers over modifying their loans; would require a single point of contact for consumers; and details disclosures and notifications that should greatly enhance consumer information and ability to respond to servicing issues promptly. Failure to provide such information, and the repeated inclusion of incorrect fees, loan balances and other problems were part of the investigation leading up to the settlement.
“While the settlement will hardly put the mortgage crisis behind us,” said Barry Zigas, CFA’s Director of Housing Policy, “it is an important step toward doing so. It’s high time that servicers that ran roughshod over consumers and violated the most basic requirements of their contracts with homeowners were held to account. The emphasis on principal reduction as part of loan modifications is very important and long overdue.”
In his State of the Union address, President Obama announced a plan to help more consumers take advantage of record-low interest rates by refinancing their home loans, even if the home’s current value has fallen below the outstanding debt. CFA issued a statement praising the plan. “Homeowners who have been making their mortgage payments but saw the value of their homes slide because of house price deflation for which they are not responsible should be able to lower their payments,” said CFA Director of Housing Policy Barry Zigas. “Today's proposal offers a sensible and modest federal ‘helping hand’ that is long overdue.”
The plan would allow the Federal Housing Administration (FHA) to insure the underwater mortgages up to 140 percent of current appraised value. The president proposed a new fee on banks to bolster FHA’s reserves as part of the plan. This fee and authority for FHA to insure mortgages at these higher loan-to-value ratios require congressional action. “Congress should act quickly on this request,” Zigas said, “and join the Administration in a bipartisan effort to help America’s homeowners reduce their monthly costs when they have been responsible borrowers in the past. American businesses and communities will see the immediate positive effects of this plan as consumers are freed to spend less on housing and more on other goods and services.”
A group of national consumer organizations, including CFA, submitted comments to the Federal Trade Commission (FTC) this month as part of its Motor Vehicle Roundtables urging the agency to end a variety of abusive auto dealer financing practices. Specifically, the groups called on the FTC to:
- prohibit auto dealer interest rate mark-ups, which reward dealers with higher compensation when they negotiate a higher interest rate loan;
- end “yo-yo” scams, in which a consumer is led to believe that the financing is final and takes spot delivery of the vehicle only to be pulled back to the dealer “like a yo-yo on a string” and pressured to sign a new finance contract with less favorable terms;
- curb loan packing, which occurs when the dealer adds a number of ancillary products to the loan amount while hiding or misrepresenting the price, terms, or value of these products ; and
- implement steps to ensure that dealers do not fail to pay off liens on trade-in vehicles or cause other harms to consumers when the dealer closes.
“We urge the FTC to take action on these abuses, as they unnecessarily cost consumers billions of dollars each year,” the groups wrote. Added CFA’s Director of Consumer Protection Susan Grant: “These steps are needed to create a fairer and more transparent automobile financing marketplace.”
Hoping to harness the power of information to create a more transparent and accountable marketplace, the Consumer Financial Protection Bureau (CFPB) has proposed to create a publicly accessible database for credit card complaints. CFA joined with members of Americans for Financial Reform and other consumer, civil rights, privacy, and open government groups to file comments with the agency supporting the proposal and offering concrete suggestions for implementation. “Public access to consumers’ complaints can help empower individuals to make smart decisions upfront, and save the CFPB time and money by helping consumers avoid potential problems,” the groups wrote. “It allows individuals to draw their own conclusions from the data … Public access to consumer complaint data also allows academics, researchers and others to assist the agency in spotting harmful trends and patterns before they have embedded themselves in a system.” The groups urged the CFPB to include the complaint narratives, which contain crucial details about the problems that consumers have encountered. They also suggested that the agency should use a similar approach to provide information about other types of complaints that it will handle in the future.