CLASS ACTION HEADACHE

The legal headaches created by the subprime crisis and its byproducts have mortgage lenders consuming Advil by the truckload.  But one pending law suit in particular has the potential to transform what is now a chronic headache for many lenders into a throbbing industry-wide migraine. 

          The underlying dispute in Andrews v. Chevy Chase Bank does not look much different from the litigation clogging court dockets all over the country.  The plaintiffs, Susan and Bryan Andrews, accused Chevy Chase of misrepresenting the terms of the adjustable rate mortgage they obtained to refinance their Wisconsin residence, leaving them with a payment that adjusted monthly instead of stable payments on a low-rate they thought would be fixed for five years. 

A U.S. District Court Judge ruled in their favor, finding that the bank had failed to disclose the payment schedule the cost of the loans, the annual percentage rate and the variable rate feature in what was described to the borrowers as a “fixed” rate.  What has attracted the nervous attention of other lenders is the judge’s approval of class actions status  for the claim and the remedy the  judge awarded – rescission of the Andrews’ loan and, potentially the loans of the 8,000 other borrowers in the class.    

“If class treatment is found to be available for rescission…the result all over the country could be massive class action law suits” filed by scores of borrowers struggling with under water loans, one of the attorneys who represented Chevy Chase told reporters.  Some class action suits are already pending, including one filed by the Illinois attorney general against Countrywide Financial, seeking rescission of loans originated through “unfair and deceptive practices.”

Chevy Chase has appealed the decision to the 7^th U.S. Circuit Court of Appeals, which is expected to issue its decision any day.  In the meantime, advocates on both sides are warning alternately that a decision against Chevy Chase would damage the mortgage industry and a decision in the bank’s favor would unfairly limit the remedies due borrowers who have been wronged. 

“Class certification of rescission claims would saddle the mortgage lending industry and secondary market with billions of dollars of class action exposure, the adverse consequences {of which] would be felt not only by the industry but also by homeowners seeking mortgage financing,” an amicus brief submitted by six industry trade groups warned. 

Consumer groups respond that the lenders are exaggerating the negative effects of the ruling.  “These are Chicken Little predictions,” insisted Kathleen Keest, senior policy counsel for the center for Responsible Lending, one of several consumer organizations supporting the plaintiffs in the Andrews case.  “Keep in mind,” Keest told Insurance Journal, “the only people who have to worry about this are people who violated the law.”  �

REVERSE MORTGAGE BATTLE

The AARP is fighting a quiet but significant battle with the financial services industry over a measure that would prevent purveyors of reverse mortgages from selling borrowers products in which to invest the proceeds of the loans.  That restriction is included in a barely noticed provision of the housing rescue bill.  Given the focus on forestalling foreclosures and, more recently, on propping up Fannie Mae and Freddie Mac, it isn’t surprising that this section of the housing bill has been largely overlooked, except by its opponents – mainly life insurance companies and some financial institutions that cross-sell investment products with the reverse loans they offer older borrowers.

Both the House and Senate versions of the bill prohibit “tying” reverse mortgages to other products – essentially requiring the purchase of one in order to obtain the other, but the Senate bill goes further, actually requiring companies to erect “firewalls” to block any link between a reverse mortgage and another product offered by the same institution.  Critics say that restriction interferes improperly and unnecessarily with their ability to cross-sell products to consumers.  

“We certainly are aghast at some of the reports we’ve seen [of abusive practices], but you can’t throw the baby out with the bath water,” Jack Dolan, a spokesman for the American Council of Life Insurers, told The Hill.  “It’s an interference with a long-term relationship,” he added.  “You’re telling [consumers] at this late stage in life to find another trusted financial adviser.”

Sen. Claire McCaskill (D-MO), who added the reverse mortgage language, says it is needed to protect elders from some of the lending abuses McCaskill and other legislators have begun to target.  Consumer advocates also point out that the legislation doesn’t prohibit reverse mortgage borrowers from investing the loan proceeds; it just requires them to obtain that investment product from an entity other than the one that originated their loan.   But, notwithstanding that debating point, many advocates, including McCaskill and the AARP, question the advisability of using a reverse mortgage to fund investments. 

“You’re already spending a lot of money to [obtain] the reverse mortgage,” David Certner, legislative policy director for the AARP told The Hill.  “To turn around and get another financial product that costs more money doesn’t make sense.”  � 

BAY STATE BASH

In what is being described as the first subprime –related suit alleging civil rights  violations, Massachusetts Attorney General Martha Coakley has sued Option One Mortgage Corp. , accusing the lender and its parent, H&R Block, of engaging in unfair and deceptive acts by making risky loans the company knew or should have known were destined to fail.

The complaint also accuses the companies of discriminating against Black and Latino borrowers by charging them higher points and fees to close their loans than similarly situated white borrowers and by using aiming marketing campaigns at minority borrowers that promoted predatory loan products. 

In a separate suit filed earlier this year, Coakley obtained a preliminary injunction against Fremont General Corp. requiring that subprime lender to seek a review from the Attorney General before foreclosing on Massachusetts borrowers.

“Unfair and deceptive lending practices such as those alleged in this complaint have contributed substantially to the escalating foreclosure crisis in Massachusetts and across the nation. Marketing loan products that were designed to fail not only harms individuals and families who are struggling to afford their homes, but also has a negative impact on neighboring homeowners and the community at large,” Coakley said in a press release.

The suit alleges that Option One and H&R Block marketed loan products to Massachusetts borrowers with a variety of risky features, creating products that posed “an exceedingly high risk” of foreclosure.  Those high-risk features included 100 percent financing, 2/28 loans with teaser rates; stated income, no-doc, or low-doc loans; substantial prepayment penalties; and “lucrative broker incentives to sell expensive subprime loans,” the suit contends.

The suit also accuses Option One of "recklessly facilitating” foreclosures by offering struggling borrowers modification terms “as unfair and unsustainable as the original loans."

"We are trying to provide some relief to homeowners, many of whom could, if they were able to get the attention of mortgage servicers and investors, restructure their loans," Coakley told the Wall Street Journal.  �   

NO FEES ON ME 

No need to stop the presses for this revelation:  Bank customers don’t like rising fees and they tend not to be pleased by institutions that levy them.  Higher fees were the top peeve cited by consumers responding to J.D. Power   and Associates’ annual he Retail Banking Satisfaction survey, and the second most frequent reason cited for switching financial institutions (poor complaint resolution experiences topped that list).   Overall satisfaction levels for bank consumers have declined by 26 points in the past year, from 763 to 727 on Powers’ 1000-point scale.   

Banks are raising fees in part to offset the financial losses they are absorbing in other areas, but those measures are affecting long-term prospects for retaining customers and expanding those existing relationships, industry analysts say.  “As banks struggle to meet shareholder demands, the common reaction is to focus on short-term financial gains, by increasing fees and reducing staff, leading to longer wait times and poor problem resolution,” Rockwell Clancy, executive director of financial services at J.D. Power, told NewsNow, the Credit Union National Association’s on-line news service.  A more effective strategy for financial institutions, Clancy suggested, would be to “differentiate themselves from competitors by focusing on customer service and convenience.”

 Financial institutions concerned about attrition might take a measure of comfort from another survey by Accenture, which found that dissatisfaction with fees does not in itself lead consumers to sever their existing banking relationships.  “Our research does   bear out that customer sin retail banking do tend to stay with the bank, not necessarily out of a strong sense of loyalty, but out of a reluctance to make the move to another bank because of all the time and cost in making that happen,” noted Greg Lowell, senior manager at Accenture, the research company that conducted the survey. 

 On the other hand, these survey results may not tell the entire story, according to Ron Shevlin, an analyst at Aite Group in Boston, who says customers may not storm out immediately in response to rising fees, but they may look elsewhere for new banking products or services.  “In the short term, [raising fees] seems like a great business move,” Shevlin told US Banker. “The problem is, it leaves such a bad taste in the consumer’s mouth.  These are the kinds of things that build up dissatisfaction over time, but the bank won’t see that in terms of a hit for at least a couple of quarters.”  � 

FIGHTING FORECLOSURES

Mayors, city councilors and state legislators all over the country have launched varied initiatives to deal with mounting foreclosures, but the New York court system is the first to offer a coordinated judicial plan for tackling the issue.  Under the program, announced recently by Chief Judge Judith Kaye, the courts will send defaulting homeowners information on the availability of legal assistance and mortgage counseling services.  The Residential Foreclosure Program is designed to encourage loan modifications, avoid unnecessary foreclosures, and reduce the foreclosure backlog that is beginning to clog court dockets throughout the state.  The initiative will begin on a trial basis in one county (Queens) this summer, but will be expanded statewide in the fall. 

"Like so many other problems that affect society, the courts end up dealing with the fallout" from foreclosures, Chief Judge of New York Judith Kaye said at a press conference announcing the program.  "We are here this morning because we believe the court system can be part of the solution."

A major concern for the courts is the 90 percent default rate in foreclosure proceedings, which suggests that many homeowners are not aware that they are at risk of losing their homes, Chief Administrative Judge Ann Pfau told reporters.  Under the program homeowners who have defaulted on their mortgages will receive two   pre-foreclosure notices – one from their lender or loan servicer and the other from the court, informing them of community resources and service providers available to help them. 

            The court notice will include a form homeowners can submit after obtaining counseling, requesting an early conference with their lender.  The conference will be arranged and overseen by a judicial hearing officer or court-appointed referee, who will help negotiate a settlement or develop a streamlined case management plan to expedite the foreclosure process.  “Early resolution is in everyone’s interests,” Pfau emphasized.