The Crowd is Getting Larger

Unless you live in a cave somewhere or just never watch any television or listen to the radio, you may not be aware of how many people are getting into the "debt ______________" business - pick a word: elimination, relief, reduction, consolidation, rescue, etc., etc.

It's like the opening day of fishing - the crowd knows there are going to be lots of fish and what we call "at-risk" borrowers are nothing more than fish to them.

The problem is, a lot of them want you to pay them up front before they actually do anything. Some of them aren't licensed. Others are actually nothing more than web sites used to collect your information to sell as leads to the debt or credit repair market. And as the news stories keep demonstrating, a lot of them are complete frauds and some can get you into illegal activities.

How can you determine whether or not they're legitimate?

The sad answer is you really can't be certain. But our recommendation is to NOT pay someone else to do something you can do for yourself. This isn't a plug but you can pretty quickly determine if you can do this with a simple tool like Charles Phelan's free downloadable guidebook (see links at right).

We've had a link to it for as long as we've been on the 'net, and no, we have no business relationship with him. It's just the most practical thing we've seen in helping people decide if they can do it themselves - and we strongly believe most people can.

So, some simple rules if you really feel you can't handle the task of negotiating down your debt on your own:

1 - Don't pay in advance and understand exactly how much you're paying in fees.
2 - Don't fill out any details about you and your financial situation on a web site form.
3 - Don't deal with any company that does not have a physical address and phone number.
4 - Make sure the company you're dealing with is licensed to provide their services in your state.
5 - Don't do anything verbally. Any and all agreements must be in writing and signed, including by someone at the company.
6 - Remember that "Consumer Credit Counseling" is a non-profit industry funded and controlled by the credit card companies. They may or may not have your best financial interests in mind.
7 - NEVER give a company authorization to take money out of your checking account automatically.
8 - Remember, if you do reduce your debt by more than $600, it will be reported to the IRS and you will owe taxes on the forgiven amount (at whatever your income tax rate is).

You're going to see more and more stories about these companies in the future, mainly because it costs almost nothing to actually get into the business and there are millions of desperate borrowers to try and lure into the program.

There are some chilling examples of just how fraudulent some of them are. Take a look at this story about Ameridebt and Debtworks.

And finally, there really is no such thing as "debt elimination" that doesn't involve paying all or some of the debt back to the creditor. Buying into one of the fraudulent schemes that claim you don't actually owe real money or that you can use secret legal means to do away with debt can even leave you in serious legal trouble. Some of the newer scams claim you can assign your debt to another company without the approval of the creditor. Another one that has been around for years offers something along the lines of a "private international administrative remedy" which is legally meaningless (and can cost you upwards of $2,500 to find out).

Be careful out there!

Craig and Dave

Don’t plan on loan modifications - here's why.

If you’re out there facing trouble with your mortgage, something that has to be rattling around in your mind is “Could my mortgage get lifted off my shoulders?”

In two words, probably not. In a lot of words we’ll attempt to explain why.

Very recent news items have probably given a lot of desperate people a false sense of hope – primarily those about Indymac and Bank of America/Countrywide. Indymac is being operated by the FDIC and BofA is basically polishing its consumer image by modifying loans Countrywide still has control of.

A little dose of reality is in order – and trying to explain it in market and accounting terms would put most readers to sleep, so we’ll use an analogy.

Imagine you want to be a farmer (investor).

You look to buy farmland along a stream or canal coming from a reservoir that is fed by a large number of water sources - basically wells up in the mountains because you need to irrigate whatever you plant every month. The reservoir/dam operator tells you how much water they are committed to release every month. It’s supposed to be a fixed, total amount that will decline slightly over some long number of years in a fairly predictable schedule.

Now, there are four of you (farmers) looking at that total monthly amount of water – you (AAA) are conservative and think you know your production rate and what you’re planting and the return you’ll get from the comparatively small amount of water you need from the stream. You buy the more expensive property furthest upstream to make sure you’ll have the same amount of water every month and you get a contract that says you’ll get it. No more, no less.

The next farm operation down the line (BBB) is paying less for that tract of land because although they may get more water to use, that amount isn’t guaranteed every month. They’re a little more willing to gamble because they think the rainfall and snowpack in the mountains is probably going to be normal. They’re pretty sure they’ll get more than enough to get a decent crop, despite knowing that their water contract isn’t a sure thing. But the relatively lower cost of the land seems to make the difference for them.

(CCC) is even more of a gambler. They’ve had enough good years behind them to take a shot at some low-cost land. They’re going to get more water than AAA and BBB but just in case, (if they aren’t completely clueless) they’ll plant thousands of acres with drought-resistant crops and hedge their bets in other investments.

The real risk takers (DDD) come in and basically say they’re so confident the weather forecasters are wrong that they’ll plant anything and everything on really cheap land downstream. They’re blinded by the money everyone else at that level has been making down here on this end because the people who say how much water is coming have told them it’s never going to stop. For years now the whole darn valley has had all the water they needed. And better yet, if the reservoir actually dries up, with the contracts they’ve got, they could even own the upstream water wells that feed the reservoir and we all know it’s eventually going to snow and rain again, right?

These farmers, not really knowing much about canals, water gates, etc., hire an expert manager (the trustee) to get the water from the stream to their farms. Everything seems fine for a few seasons. The weather forecasters (raters) aren’t predicting low rainfall levels. The reservoir/dam operator manages to keep the right amount of water going into the stream to make the water manager and his farmers happy.

Now – here’s where things come apart.

The reservoir/dam operator (the mortgage servicer) is starting to have trouble with some of the water sources (the borrowers). Some of the wells that feed the reservoir are drying up or are being blocked. In fact, the snow and rainfall feeding some of the tributaries to the wells just didn’t happen (the list of possible reasons is too long to put here) or what they’re now finding out is that thing that was supposed to be a well was nothing more than a mud puddle. And there are even quicksand areas.

So what does the reservoir/dam operator (servicer) do? Call the water manager (trustee) and let him know there isn’t as much water coming from the dam. He has to reduce the flow to the DDD farmer downstream. If things get worse, DDD doesn’t get any water at all and CCC gets cut back, and so on.

So when some of the wells run dry, these holders of the lower tier water rights suffer.

But they went in knowing the risks based on the weather forecaster’s (raters) track record. What they didn’t know is the reservoir/dam operator was paying the forecasters.

It all worked well for so long that everyone in the game was happy with it. Food was produced, consumers were getting what they wanted and everyone in on the game was putting away a fortune to retire on.

But the weather finally changed. Snow stopped falling on the mountains and runoff dwindled, wells dried up and eventually the downstream farmers couldn’t even plant, let alone harvest a crop. Their low-priced land became worthless while farmer AAA was still doing OK.

Trouble is the BBB, CCC and DDD farms had placed side-bets that they’d be able to get water and produce a crop. And their backers (other investors) had taken those bets. See, if I’m a farmer and I convince you I’m going to have $XXX after I harvest the crops, you might give me $X to let me buy seed and diesel to do it. But when there’s no water and I can’t produce anything, you’re stuck. I don’t have a penny; if I’m farmer DDD all I’ve got is equity in some dry wells up above the reservoir that I’m trying to get the water company to sell or fix.

Keep in mind it’s the financial backers of the lower-tier gambling farmers that are getting bailed out in this recent $700B legislation.

Now, back to the subject of getting a loan modified.

That water manager – the trustee works for the farmers. The reservoir/dam operator (the servicer) has a contract with the trustee. It’s the Pooling and Servicing Agreement (PSA).

Those lower-tier farmers aren’t exactly happy when things get dry. They have problems of their own. Water is everything. They want it for the crops they have in the ground – getting it next month or next year or some years down the road is out of the question. It’s this season that counts partly because of those people they gambled with (and borrowed money from).

And just to bring this to a real-world scenario – “farmer” is not really just one person. A farmer in this story can literally be dozens of bond holding entities, none of which can make decisions for the others let alone come to agreement on something.

So the normal course of events is to foreclose on the dry well and try to sell it to someone who has water from somewhere else.

Let’s say for the purposes of this analogy that when the reservoir/dam operator (servicer) takes over and shuts off a well (forecloses), they also know some people who are trucking in X tons of water to the reservoir from prior auction sales. In fact, those tons of trucked-in water are a regular part of the business. So much a part that even if five wells go dry this month, their former small flows are more than replaced by the truckloads that came in from five foreclosures in prior months.

So the FLOW of water to the farmers is actually sustained if that earlier process of selling off dry wells keeps the future tanker trucks coming – for a while, that is. Eventually, without enough producing wells, even the truckloads can’t keep the reservoir level high enough. The water company is still supplying farmer AAA, farmer BBB is getting less than they thought, farmer CCC has had to cut back their operation and farmer DDD now owns a bunch of dry wells and is beating on the water company to produce water for him again by selling them off.

But before things get to that point, between the still-working wells and trucked-in water, the reservoir/dam operator may figure they can keep the farmers happy for quite a while. And they’re the only player in the game who really knows where the water is coming from and where it’s going. Why go to the effort of modifying a well-water agreement if you can keep your down-stream customers happy?

Now, if things have gotten bad and the farmers are making threatening noises, there might be a motive to negotiate something to get more water over a period of time. But without the agreement of ALL of the farmers the trustee won’t budge. Good luck with that.

Craig and Dave

The sky is falling, the sky is falling! Well, not really.

Wow is about all we can say, and not about the bailout or the hearings or the investigations - it's the way it's being portrayed.

The hysteria over what is going on in Washington and New York seems to be mounting, and the “news” media has stepped in to keep us all breathlessly flipping channels and surfing sites, listening to talk shows and of course – being saturated with advertising.

And a lot of people seem to believe something major is going to change in their loan situation; they’re not sure what it is, but maybe, just maybe the really ugly mortgage they’re in is going to get fixed or that the perpetrators of this mess are going to be punished.

It’s too early to know what the legislation is or isn’t going to let the Department of the Treasury do, but we believe it’s a safe bet that hiring several thousand people to redo troubled loans and provide great customer service isn’t going to be part of it (this is, after all, the home of the IRS). And we really doubt there is going to be a servicing bureau in the Treasury. They’ll probably see no need to change servicers.

Short view – NOTHING CHANGES on your loan. Long view – if you have a really bad loan in a really bad pool of similar loans and it gets bought by the Treasury, it all depends on what powers the Treasury secretary is given to deal with it and who they sell it to when they’re ready.

But still, you better not count on them negotiating a modification with you. Some sources indicate the way the law is currently proposed would allow the Treasury to cancel existing PSAs and auction the servicing rights to the highest bidder. At least one believes they’ll do what is known as a “cram down” where the principal balance will be forced down to the value of the property and the interest rate will be set to some viable fixed rate. We don’t think they’ll be equipped to do that on an individual loan basis.

The lending industry is fighting hard to keep that power out of the hands of bankruptcy courts, but if the Treasury department owns the loan, there apparently isn’t anything stopping them from doing the loan modifications across the board on a pool.

There may be some good news in the future for a certain number of borrowers, but given the fact that it’s a bureaucracy we don’t hold out a lot of hope.

In the mean time, the Fairy Godmother isn’t coming to help most borrowers.

Craig and Dave

EMC Mortgage settles with FTC

Bear Stearns and EMC Mortgage to Pay $28 Million to Settle FTC Charges of Unlawful Mortgage Servicing and Debt Collection Practices.

The Bear Stearns Companies, LLC and its subsidiary, EMC Mortgage Corporation, have agreed to pay $28 million to settle Federal Trade Commission charges that they engaged in unlawful practices in servicing consumers’ home mortgage loans. The companies allegedly misrepresented the amounts borrowers owed, charged unauthorized fees, such as late fees, property inspection fees, and loan modification fees, and engaged in unlawful and abusive collection practices. Under the proposed settlement they will stop the alleged illegal practices and institute a data integrity program to ensure the accuracy and completeness of consumers’ loan information.

“Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due really is the amount due,” said Lydia B. Parnes, Director of the FTC’s Bureau of Consumer Protection. “Consumers have the right to expect accuracy from the company that collects their mortgage payments.”

As stated in the FTC’s complaint, Bear Stearns and EMC have played a prominent role in the secondary market for residential mortgage loans. During the explosive growth of the mortgage industry in recent years, they acquired and securitized loans at a rapid pace, but they allegedly paid inadequate attention to the integrity of consumers’ loan information and to sound servicing practices. As a result, in servicing consumers’ loans, they neglected to obtain timely and accurate information on consumers’ loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practices. These practices occurred prior to JP Morgan Chase & Co.’s acquisition of Bear Stearns, which became effective on May 30, 2008.

According to the complaint, EMC is the mortgage servicer for many of the loans Bear Stearns and EMC acquired. Many of these loans are subprime or “Alt-A” (less than prime) loans, including nontraditional mortgages such as pay option adjustable rate mortgages (“pick-a-payment” loans), interest-only mortgages, negative amortization loans, and loans made with little or no income or asset documentation. EMC’s loan servicing portfolio has grown significantly in recent years; as of September 2007, it serviced more than 475,000 mortgage loans with a total unpaid balance of about $80 billion.

THE FTC COMPLAINT

The complaint charges Bear Stearns and EMC with violating the FTC Act, the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Truth in Lending Act’s (TILA) Regulation Z.

FTC Act Violations: The defendants are charged with unfair and deceptive loan servicing practices in violation of the FTC Act. They allegedly misrepresented the amounts consumers owed; assessed and collected unauthorized fees, such as late fees, property inspection fees, and loan modification fees; and misrepresented that they possessed and relied upon a reasonable basis for their representations about consumers’ loans.

Fair Debt Collection Practices Act Violations: The defendants allegedly violated several provisions of the FDCPA in collecting loans that were in default when they obtained them. They also allegedly made harassing collection calls; falsely represented the character, amount, or legal status of consumers’ debts; and failed to communicate that debts were disputed. In addition, they allegedly used false representations or deceptive means to collect, and failed to send consumers a validation notice containing the amount of the debt and the consumer’s right to dispute the debt and obtain verification of the debt.

Fair Credit Reporting Act Violations: The FTC alleges that the defendants furnished information about consumers’ payment status to credit reporting agencies (CRAs). When consumers informed the defendants that they disputed the completeness or accuracy of the reported information, the defendants failed to report the dispute to the CRAs as required by the FCRA.

Truth in Lending Act’s Regulation Z Violations: The complaint also states that the defendants charged borrowers a loan modification fee, typically $500, and automatically added the fee to the modified loan’s principal balance. In doing so, the defendants failed to provide the borrowers with required TILA disclosures.

THE SETTLEMENT

The proposed settlement requires Bear Stearns and EMC to pay $28 million to redress consumers who have been injured by the illegal practices alleged in the complaint. In addition, the settlement bars the defendants from future law violations and imposes new restrictions and requirements on their business practices. Specifically, the settlement:

bars the defendants from misrepresenting amounts due and any other loan terms;

requires them to possess and rely upon competent and reliable evidence to support claims made to consumers about their loans;

bars them from charging unauthorized fees, and places specific limits on property inspection fees even if they are authorized by the contract;

prohibits them from initiating a foreclosure action, or charging any foreclosure fees, unless they have reviewed all available records to verify that the consumer is in material default, confirmed that the defendants have not subjected the consumer to any illegal practices, and investigated and resolved any consumer disputes; and

prohibits the defendants from violating the FDCPA, FCRA, and TILA.

The proposed settlement further requires Bear Stearns and EMC to establish and maintain a comprehensive data integrity program to ensure the accuracy and completeness of data and other information that they obtain about consumers’ loan accounts, before servicing those accounts. The defendants must obtain an assessment from a qualified, independent, third-party professional within six months and then every two years, for the next eight years, to assure that their data integrity program meets the standards of the order.

The proposed settlement also contains record-keeping and reporting provisions to allow the FTC to monitor compliance with the order.

The Commission vote to authorize staff to file the complaint and proposed stipulated final order was 4-0. The documents were filed in the U.S. District Court for the Eastern District of Texas.

Including the case announced today, the Commission has brought 23 actions in the past decade alleging deceptive or unfair practices by mortgage brokers, lenders, and servicers. Several of these landmark cases have resulted in large monetary judgments that have returned more than $320 million to consumers.

CONSUMER HOTLINE: If the court approves the settlement, consumers who are eligible for redress will be contacted by mail. The Commission’s consumer hotline regarding the settlement is 1-877-787-3941. Consumers who have changed their address recently may provide updated contact information by calling the hotline. Consumers also can find information about the settlement on the FTC’s Web site at http://www.ftc.gov.

NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The stipulated final order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC's online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC's Web site provides free information on a variety of consumer topics.

MEDIA CONTACT:

Frank Dorman,

Office of Public Affairs

202-326-2674

STAFF CONTACT:

Lucy Morris,

Bureau of Consumer Protection

202-326-3224

Watching train wrecks, part 2.

Five signs of an impending train wreck

Most of the people we hear from or read about have a tendency to either not include enough information about their situation or they do a life history dump and include things that we’d frankly rather not know.

But from some of those, we can tell readers there’s a pattern, and there are several common train-wreck predictors that really shouldn’t be a major surprise to most of us:

Number one is the lack of a reserve. Instead of having 60, 90 or 120 days to respond to whatever situation comes up, in many states at-risk borrowers are usually only a paycheck or two away from not living in their home.

Number two are precipitating events, the most common being a loss of income for any number of reasons, often involving medical factors and combined with job loss. And without the reserve, by the time the income is restored number three has kicked in.

Number three which is often as a result of number two, the at-risk borrowers’ credit is so damaged that they may even have trouble finding a lease or rental property that would allow them to more gracefully exit the property on their own schedule.

Number four includes a propensity to have other consumer debt. We can tell you attorneys in foreclosure mills love to find high-interest auto loans, rent-to-own accounts, high credit-card balances and other default accounts in a borrower’s credit report. No matter what the issue is, the picture is easy to paint that it’s the borrower’s fault, not that of the servicer.

Number five may have been overlooked. Professor Elizabeth Warren pointed this out in her book “The Two Income Trap,” some years ago – you could conclude that children cause bankruptcy. Well, not exactly, but the chances of someone filing bankruptcy increase radically if they have school-aged children. The reason, according to her study is parents have a tendency to take on more home debt than they should to get their children into “better schools.”

So here’s the pattern (it should sound familiar):

• Parents want to live in a good school district so they go for the house that is really a bit of a stretch beyond even their two-income cushion. Until recently, lenders were more than happy to oblige, even go beyond just encouraging into outright fraud.
  
• The too-high house payment puts pressure on other expenses and lifestyle choices don’t adapt to the new conditions quickly enough, hence debt tends to accumulate and there is no chance to accumulate a reserve.
  
• Something happens and income is cut or some extraordinary expense comes along. Then the decisions about what will be or won’t be paid get harder.
  
• Defaults on one or more things occur, credit scores suffer and they’re trapped. If there is any equity at all they’re the perfect at-risk target for opportunistic collectors and servicers.

We’re surely not alone in seeing this pattern, but we think we’re among the few who see the opportunism at work when the train is nearing the wreck site.

(To be continued)

Craig and Dave

Watching train wrecks

We first have to point out to our readers that we’re biased in favor of consumers and borrowers. Our company philosophy revolves around people not having to resort to the “legal system” to get a company to do something it should have done to correct a problem before the train goes off the track and the court filings start.

But there’s a hidden parallel problem a lot of otherwise responsible and even well-meaning business executives don’t seem to be aware of.

Consider these four important facts:

1. A large portion of the consumer population is employed by major corporations (according to the Census Bureau there are over 57 million people working for companies that have more than 500 employees).
   
2. Some (we believe a fairly large) portion of that employed population is in or approaching a debt crisis.
   
3. Most employees will talk about almost anything, except serious financial problems.
4. People experiencing financial problems will all-too-often delay taking effective action.
   

Which means some of those responsible and even well-meaning executives aren’t seeing the train wrecks and don’t understand the impact they have on their companies.

Granted, with a few exceptions for some positions, for privacy and confidentiality reasons an employer really shouldn’t delve into the financial problems of its employees. They shouldn’t have to. But there needs to be an awareness that people facing serious financial problems aren’t exactly functioning at their best and are spending inordinate amounts of on-the-job time and mental energy dealing with non-work issues.

And we’re not talking about providing “consumer credit counseling.” That’s nothing more than cleaning up after the train wrecks.

Everyone needs to finally admit that the only viable, long-term answer for many people (and our economy) is debt prevention, and how to get that message to those who need it most before the train accelerates is going to take more than some quick-fix web sites and alarming news articles.

(To be continued)

Craig and Dave

Mathematically Challenged

Those who have been around this mess for a number of years are used to hearing the same questions from newly-impacted borrowers, and another frequent one is “If the bank is losing so much money on foreclosing, why won’t they let us work something out?”

The fact that the borrower still thinks they’re dealing with a “bank” that made their loan is revealing; in fact, it you were actually dealing with a bank or credit union that retained its own loans they may very well be willing to work something out.

But in the real world of securitization and subprime and alt-A lending, the party who you have to deal with is the servicer, and the servicer is a captive to the pool trustee under something called a “Pooling and Servicing Agreement” (PSA). That PSA dictates the terms and conditions under which a servicer is supposed to manage defaults and foreclosures, and it is all but impossible to find the PSA that allegedly governs a borrowers loan until the name of the trust is uncovered in a lawsuit and the SEC filing for the trust can be found.

Maybe this diagram will help:

Note that the "servicer" can be as many as four separate entities, but a single servicer can perform all four functions - all of which are defined and legally contracted to in the PSA.

Bond investors generally don’t pay a lot of attention to the PSA if it appears to be one of the standard so-called “boilerplate” versions that go into the securities offering. They pay more attention to the ratings of the servicer until something goes wrong and they start looking into how the pool is supposed to be serviced. The servicer can be (and in some cases today is being) sued for not handling the loans they way they’re supposed to be in terms of default management. Most trustees have the right to change servicers if the terms and conditions of the PSA aren’t being met. If they get into the details of some of the more toxic loans, the trustee may even push back against the originating lender and force them to purchase the loan back out of the pool.

Of course, in most subprime loans, PMI (Private Mortgage Insurance) is in place as a "risk enhancement" to improve the pool's marketability, thus the insurer also has an interest in the loan.

As you can see, there are multiple players, all with their own interests to protect and all with their own version of the numbers involved.

If we use the numbers recently provided in testimony before Congress, the average loss in a foreclosure is in the neighborhood of $50,000. We're pretty confident that is wildly exaggerated, but the more exaggerated it is the more it makes our point:

Why are they in such a rush to lose money?

In the formal statement of David G. Kittle, Chairman-Elect of the Mortgage Bankers Association, he rails on and on about the enormous costs of foreclosure and how “MBA members are devoting significant time and resources to finding ways to help borrowers keep their homes.”

Again, why then the rush to lose money by foreclosing?

The only legitimate defense has to be the terms and conditions of the PSA - but that also requires the parties to say they aren't willing to modify it. And if that decision is resulting in $50,000 losses per foreclosure, either that number is simply a myth or these entities are truly mathematically challenged and their stockholders should be asking more questions about who is making business decisions.

We have some suggestions; if the industry really wants to avoid losing $50,000 per foreclosure, they're going to have to start acting as if they really stand to lose that much. Someone trying to avoid a $50,000 loss would not:

(1) Send payments back to borrowers for any reason or put payments into suspense accounts.
(2) Let a modification opportunity wait until the loan was in serious default, thus trashing a borrowers credit score to preclude refinancing.
(3) Add absurd fees and charges for forbearance or reinstatement.
(4) Give borrowers the run-around and not have a single point of contact for an at-risk borrower.
(5) Continue to tack on fees and charges while "processing" the modification.
(6) Refuse to respond to RESPA QWR letters.
(7) Ignore requests from agents and refi lenders for payoffs.
(8) Keep blaming a third (or even fourth) party for the lack of a decision.
(9) Have ill-informed personnel handling something that could result in a loss of $50,000.

Now, if the real losses were much smaller (or in some cases weren't losses at all), a servicer would do all of the above (and more) to ensure the loan went into foreclosure.

It's all about the math.

Craig and Dave

The TILA rescission craze

We are hearing – or we should say, receiving emails – from borrowers who are being inundated with offers to save them from foreclosure through not only the scams we outlined in the last post, but through the Truth In Lending Act. There seems to be some misunderstanding not only about the outcome but the process.

Let’s start by quelling the rumor that you can get a house free-and-clear by just sending a letter rescinding your loan. It’s not that simple.

Keeping in mind our standard disclaimer about legal advice, understand that if you think you can get a TILA-based rescission, you’d better be ready to pay back the original principal balance. True, what you’ve paid (principal, interest, escrow) as well as the originating fees, points, etc., is going to be credited to you in the process. That will come in handy in reducing the original principal if the loan has been in force for a while.

Let's say you took out a $100,000 loan and over some time (less than three years) you've paid in about $12,500 in interest, principal, escrow, etc., and you paid a total of $2,500 in fees, points, etc. The letter goes out and the court battle ensues. If you prevail in that process, the loan may be rescinded, but there will still be the original principal balance to deal with MINUS the amounts you've paid, i.e., $15,000.

You bring $85,000 with you and wham, the loan will be rescinded. If you don't or you don't have a lender lined up it depends on the court. In the 3rd district, we know from an appellate court ruling that the loan won't be rescinded unless the borrower can pay off the principal.* We have heard from sources in others that the debt becomes unsecured. You need your own local legal counsel to navigate this one.

In general, the easiest way to view a TILA rescission is that the parties are put back to where they were before the transaction took place. It's as if the loan was never made. But you have to remember that to get back to where they were before, the lender would have to get back the principal they loaned. Obviously, they can't go after the previous lender/creditor and ruin their day - the principal is tied up in the homeowner's equity.

Now some of you may be thinking along the lines we've been talking to people about: Depending on the legal landscape where you live and the servicer/trustee you're facing, a viable TILA action may be the catalyst to get a major loan modification if you act before you're in default or foreclosure (once you're that far along the balance of power swings to their side. Remember a TILA case can also result in them paying your attorney's fees, so you may have some serious leverage if you have some bona fide TILA violations.

And just a note about timing: The statute of limitations on TILA doesn’t “toll” from the date you discover the flaws – you have three years, period.

“.... the three year limitation on actions for rescission is not a statute of limitations subject to tolling, but rather it is a statute of repose, which creates a substantive right, not subject to tolling”); Spann v. Community Bank of Northern Virginia, 2004 WL 691785, *4 (N.D. Ill. Mar. 30, 2004)

As always, there are more nuances than simple answers and we can't reiterate often enough that knowledgeable local legal counsel is the place to begin.

Craig & Dave

*More case law on rescission:

FDIC v. Hughes Dev. Co., (8^th Circuit. 1991) District court did not err in conditioning rescission on tender of $100,000 principal within one year.

Williams v. Homestake Mortgage Co., (11^th Circuit, 1992) Voiding of creditor’s security interest in home may be conditioned on consumer’s tender of amount owed to creditor after subtracting all finance charges and penalties.

Bustamante v. First Fed. Sav. & Loan Ass’n, (5^th Circuit, 1980) Creditor’s TILA obligations were not automatically triggered until obligor tendered repayment.

There’s more to the mess than just the mortgages

For several years we’ve focused on mortgage servicing issues, particularly on how to avoid being taken advantage of. After all, as Will Rogers said, “It’s easier to stay out than get out.”

But something we’ve discovered which really shouldn’t surprise most people is there are far more borrowers out there headed toward the brink of mortgage trouble than those already being harassed or foreclosed on.

And like millions of people, they’re carrying mountains of other debt, primarily credit card balances and other unsecured debt with astronomical interest rates.

Not exactly news, is it? What is, or needs to be news is some people are so desperate to stay in their homes that they’ll turn to almost anyone or try anything to get out from under their other debts so they can keep making the house payment.

Which brings us to a word of warning: Never pay anyone who says they can eliminate your debt for you – especially if it’s a web site offer or is being marketed through a network of referral participants. And we’re not talking about reducing debt via negotiation which anyone can do for themselves with a little knowledge. The dangerously expensive programs are those that claim to actually eliminate your debt over a very short period of time.

We’ll be outlining some of the more common schemes in more detail as well as the new ones that keep cropping up, but there are some huge red flags too many people just don’t see in their desperate search for a solution. Major red flag examples are claims like:

1 – The bank loaned you their credit, not money. According to the promoters, it's supposedly illegal for banks to do that.

2 – There is an “administrative remedy” process that you can use (or that they’ll conduct for you) that will not only eliminate your debt but will make it so the creditor actually owes you money. You’ll find these embellished with terms like “international” and “admiralty” in some versions.

3 – You can protect yourself from creditor lawsuits by filing UCC statements and separating yourself from your all-capitals name “strawman.”

4 – For a fee, they’ll take care of your debt, even assume it from you and they know how to turn the tables on the creditors through a unique arbitration program or something that's known as novation.

5 – You can submit things such as an “affidavit of truth” or a “bill of exchange” or file a commercial lien against a creditor.

6 – That you can prevail through common-law arguments.

The promoters have learned to flood the Internet with press releases and affiliate web pages so they show up in Google searches. They use recorded audio messages, some have “conference calls” to listen in on and even YouTube videos are appearing. Trying to keep a list of them would be a full-time job so the best bet is to look for those red flags and NOT SEND THEM MONEY!

Craig and Dave

What a long, strange trip it's been

Welcome to the new "BorrowerHelp" site/blog!

Given the dynamics of the lending industry and the proliferation of servicing problems, the traditional web page-based site has simply become too cumbersome when compared to the simplicity and speed of today's blogs.

This much more interactive and immediate response style will help us get information about the issues borrowers are facing to more people sooner. And in addition to a focus on what works and what doesn't, we'll be drawing on other experts and including their commentary here.

So keep sending emails with your issues - of course we're not attorneys and we can't give you legal advice, but over the years we've seen the good, the bad and the ugly and may be able to steer you to a viable source of information.

And if you have a suggestion or comment about what you see, please feel free to click in on the "comment" link below - you'll need a Google account but that's easy and painless. There are a lot of people out there who have valuable insight to share. Because of the nature of things like forums, we obviously have to edit submissions, and we won't publish someone's name unless they insist, but if the comment is helpful or interesting we'll include it.

And one more thing - we're not interested in politics, vast conspiracy theories or hyperbolic accusations. There's enough of that on the 'net already.

So welcome aboard! Take some time to check the news links and then spread the word!

W. Craig Kenney craig@borrowerhelp.com
Dave R. Mortensen dave@borrowerhelp.com