The return of government regulations
Recently, an agreement between all 50 states and the country’s five leading bank mortgage servicers was achieved by the National Mortgage Settlement. The result was a settlement for $25 billion.
A federal investigation was launched “following revelations of widespread use of ‘robo-signed’ affidavits in foreclosure proceedings across the country,” according to the agreement.
Other problems included so-called dual tracking in which homeowners were led to believe that a loan modification was imminent only to find their home suddenly foreclosed by that same bank.
The agreement chastised the banks for their poor conduct: “Unnecessary foreclosures occurred due to failure to process homeowners’ requests for modified payment plans. This misconduct threatened the integrity of the legal system and had a negative impact on communities and the overall housing market.”
The settlement requires that all of the $25 billion be paid to homeowners who either have been harmed or are on the road to an unfair foreclosure. Some $17 billion must go to homeowners who have the means and intent to remain in their homes but cannot afford the entire mortgage payment. Of that, more than half is required to go toward reducing the principal for borrowers in default or who are at risk of default. Approximately $5.2 billion is earmarked for other homeowner assistance such as permitting a short sale, relocation costs, and for deferring payments for unemployed homeowners until they land other jobs. There is also $3 billion to refinance loans for people who owe more than their houses are presently worth, a common problem in California.
In response to allegations of minority bias, on July 12 the U.S. Department of Justice announced a $175 million settlement with Wells Fargo bank for inferior treatment and higher costs on loans given to African-Americans and Hispanics.
It requires that $125 million in compensation go to wholesale borrowers who were steered into subprime loans or who paid more in fees and rates than white borrowers. The bank must provide $50 million for down payment assistance to residents of eight hard-hit areas, including the Inland Empire. Another $10 million will go in damages to approximately 4,500 victims in central Los Angeles County.
That settlement followed on the heels of a rare bipartisan law called the California Homeowners’ Bill of Rights that, among other things, bans dual tracking. It also requires the banks to have a single point of contact for customers trying to modify their home loans.
A failure to deal openly and honestly with homeowners occasionally had tragic consequences. Norman Rousseau of Newbury Park committed suicide last May just two days before Wells Fargo evicted his family. Rousseau had been fighting with the bank over a mortgage payment the bank claimed it had never received, despite the fact that the check had been endorsed by the bank. The dispute landed in court. Rousseau’s widow, Oriane Rousseau, is continuing the fight.
Norman Rousseau of Newbury Park committed suicide last May just two days before Wells Fargo evicted his family. Rousseau had been fighting with the bank over a mortgage payment the bank claimed it had never received, despite the fact that the check had been endorsed by the bank. The dispute landed in court. Rousseau’s widow, Oriane Rousseau, is continuing the fight.
“I want the bank to know that this lawsuit will not be dropped,” she said. “Justice will be done. I hope this tragedy turns to something good. I don’t want anybody to go through this. Nobody.”
Rousseau was not the first death known to be connected to a bank foreclosure. A man in Ohio who was facing eviction killed his wife before shooting himself last March, according to The Columbus Dispatch. Just a week before Rousseau’s death, a Connecticut woman facing foreclosure shot herself to death after killing her mother, reported the Stamford Advocate.
Carlos Marroquin, an activist with the Occupy movement, experienced losing his own home a few years ago. Marroquin said the new state bill will change things for homeowners and lenders.
“The new Homeowners’ Bill of Rights sends a strong message to the banks that they cannot continue business as usual,” Marroquin said. “No longer will the banks lead you to believe that they are helping you while, at the same time, [they] are taking the home away from you. No more being transferred from one department to another. With one person handling your case, that person alone will be responsible for what happens to your documents. That is very good.”
Kevin Stein is the associate director of California Reinvestment Coalition, a nonprofit organization that advocates for homeowners. He said the group, comprising 300 nonprofits, has been supporting legislation banning dual tracking for the past few years.
“We have found the dual track problem, where homeowners think they are negotiating for a solution with the bank but the bank continues the foreclosure process, has been kind of lifted up and prioritized by our members as something that needs to stop,” Stein said. “It’s a basic fairness question. Now you have a right not to have this happen to you.”
Not everyone is happy with the new homeowners’ right to sue their banks under limited circumstances.
Communications Director of the California Mortgage Bankers Association Dustin Hobbs said he was disappointed with the bill.
“Portions of the bill will litigate and lengthen the foreclosure process,” Hobbs said. “It’s the overly complicated dual tracking provision that has created a series of procedural traps. We are concerned the bill will threaten the recovery of the real estate market and the overall economy in California. From our perspective, when we lengthen and litigate the foreclosure process, we really threaten the economy.”
Not all financial groups are in agreement. Beth Mills is the vice president of communications for the California Bankers Association. Mills said there are parts of the bill that the group supports.
“Generally speaking, we did not oppose the concept of eliminating dual track,” Mills said. “We did feel that homeowners should get an answer whether or not they qualify for a loan modification before their home is foreclosed upon.”
Mills said her group also agreed with the idea of a single point of contact for the homeowner, what it calls a consistent point of contact.
The issue of litigation, however, also bothers Mills. “Our industry did have and still has significant concerns about the litigation aspect that we think may result from the bill. But if homeowners can qualify for a loan modification, that’s what our guys want to do. They don’t want to take that property back and have a foreclosure that they need to deal with on their books.”
Stein said one reason he supports the Homeowners’ Bill of Rights is the clause that lets consumers sue their banks.
“The right of action, we thought that was critical,” Stein said. “It’s not because we want to see litigation; it’s the threat of litigation that will move servicers to finally change their practices. It’s a way to ensure compliance. We know there will be instances when somebody falls through the cracks, which has been the story of the foreclosure crisis. There are all these programs out there supposedly to help people, and a lot of people qualify and yet they are losing their homes.”
The percentage of U.S. sales of residential homes that are foreclosures is still increasing. According to RealtyTrac, foreclosures accounted for 26 percent of sales during the first quarter this year, up from 22 percent the previous quarter. In California, whose foreclosure rate is eclipsed only by Nevada, 47 percent of residential sales were foreclosures during the first quarter.
It has been widely reported that the robo-signing and failure to read foreclosure documents was the fault of low-level bank employees, those who did the actual signing. But last March, federal investigators said it was actually the managers who knew about the problems yet did nothing to correct them.
Federal official David Montoya said in a New York Times article, “I believe the reports will leave the reader asking one question — how could so many people have participated in this misconduct? The answer — simple greed.”
Tom Pflaumer, a mortgage broker from Moorpark, sees both sides of the lending issues. He said the homeowner is often snared in a catch-22 situation due to changing bank rules.
“The banks won’t even consider a loan modification unless you’ve missed a few payments. When you are late, some loans demand that if you are ever late on your payment, you automatically can’t get a loan modification,” Pflaumer said. “Homeowners are damned if they do, damned if they don’t.”
Just getting a loan, even for well-qualified buyers, is a difficult feat. Pflaumer explained what you may run into. “I tell my clients there will be hoops of fire that you will have to jump through. Just when you think you have cleared all the hurdles, there’s another hoop of fire. It can be frustrating.”
Among the most aggravating bank practices, especially for those who live paycheck to paycheck, has been the way overdraft fees have been tallied.
Not long ago, before it was banned, the banks would not only charge the person who wrote the overdraft check, but they would also charge the person who received the check. Many times, even a very small overdraft would bounce around undetected by the customer, gathering more and more fees and charges. In fact, the Consumer Federation of America found that two-thirds of banks now charge per-day fees if the overdraft is not immediately repaid.
A Consumer Federation spokeswoman said in a news release that the charges can become outrageous. “Consumers can be charged up to $370 in one day,” according to some bank policies. She added that overdraft loans have become a form of payday lending.
Another often-criticized practice the Pew Project found at most banks was their insistence on reserving the right to process withdrawals based on dollar amount instead of chronologically. According to the report, this “maximizes the number of times an account goes negative, thus increasing overdraft fees.” The banks can change the order of how they pay your withdrawals and they do not have to tell you.
If you weren’t aware of this practice, maybe you missed it in the fine print. The report said the median disclosure from a bank is 69 pages long. Pew’s spokeswoman said, “Consumers are expected to wade through long, confusing documents and may be subject to steep, unexpected fees to access their own checking accounts, the cornerstone of household financial management.”
And that was how banks made $29.5 billion in overdraft fees in 2011.
Until now, the manner in which a college student received financial aid was in a check written by the university and mailed directly. But at about 900 college campuses, those days are over. Now, it will cost the students several different bank fees to access their own financial aid. This violates the U.S. Department of Education rules but it is happening anyway.
Higher One, owned by Bancorp, is one of the banks that contracted with schools to be the preferred debit card on campus. Credit cards and personal checks are no longer accepted as a means of tuition payment. It must be through the school-issued Higher One card or others like it. None of these actions was even disclosed to the students.
A report from the U.S. Public Interest Research Group found that Higher One opened bank accounts for the students without their knowledge or permission, even before matriculation. There are per-swipe fees, inactivity fees, overdraft fees, ATM fees and fees to reload a prepaid card. Another prohibited fee charged by Higher One is a $50 “lack of documentation fee.” That is charged to students who have not submitted certain paperwork.
A class action suit has been filed against Higher One by a student at Ventura College. The lead plaintiff, Sherry McFall of Ventura, claims that students have been deceived into opening Higher One accounts in order to get their own financial aid funds, only to then be charged unfair and undisclosed banking fees. The lawsuit said the practice not only violates consumer protection laws, it breaches Higher One’s own contract, which is unilaterally imposed on the students.
Banks have not been having a good year when it comes to government and law enforcement agencies catching up with their deceptive and sometimes illegal practices. For example, JPMorgan Chase has recently admitted that its traders have hidden huge losses, now reaching $6 billion. Experts say losses may climb to $9 billion.
Barclays Bank in London has contributed to global financial uncertainty by lying about the interest rate that it pays. The Federal Reserve indicated that the problem goes all the way back to 2007.
The tone of the Barclays traders’ e-mails echoed the arrogance from the Enron days in 2003. That was when Enron withheld power from California, which forced rolling blackouts. Enron then gouged the state in outrageous long-term contracts, an act that contributed to the recall of Gov. Gray Davis and the election of Gov. Arnold Schwartzenegger. As one of the worst fire seasons plagued Southern California in 2003, Enron employees were heard on tape saying, “Burn, baby, burn.”
In that same vein, a Barclays trader responded to another trader’s request to fix an artificially low rate. The trader e-mailed, “Done … for you big boy.” The reply was, “Dude, I owe you big time!”
A commissioner at the U.S. Commodity Futures Trading Commission said, “The traders were barking orders like they were at a fast food drive-through, and the submitters were so accommodating that they might as well have said, ‘do you want fries with that?’ ”
Barclays was the first to settle with authorities in the U.K. and the U.S. Most of the world’s biggest banks, however, are being investigated for allegedly rigging rates. Their false claims of low interest rates have skewed the London interbank lending rate, known as LIBOR. The rates set by LIBOR are used worldwide to set corporate and personal borrowing rates.
The CEO of Barclays, Robert Diamond, has resigned. The bank was fined $453.6 million. A senior Barclays treasury manager defended his bank as not the worst around. “We’re clean, but we’re dirty-clean, rather than clean-clean. No one’s clean-clean.”
Perhaps all of this makes you want to switch banks. Good luck; you will need it. You will also need unlimited patience and a good chunk of change. Consumers Union set out to see what it takes to close a bank account. It tested 10 major banks and found that none of those banks offered a free same-day electronic transfer. They all charged for wire transfers or certified checks, which can cost $10-$30.
If you want to open an account at a smaller bank, it can take a few days or as long as two weeks for the paperwork. If you have automatic payments or direct deposits, the process can be very complicated and can take four to six weeks.
Even then, it won’t take much for your old bank to reopen your account. Just having the bank receive a deposit or having any activity occur on the closed account can reactivate it. That reopened account can then generate hefty fees if the minimum amount does not remain in the account, which you think has been closed.
If a dispute arises and you decide to take your bank to court, be prepared to lose even if you win. Four major banks and one large credit union have placed a clause into their customer agreements that makes the customer liable for any losses to the bank arising from a dispute. That includes attorney fees.
Attorneys at Pew Charitable Trusts say this clause is probably not legal but the purpose of it is to frighten consumers away from any formal disputes. It is called “fee shifting.”
The clause that you may have missed when you signed up for a credit card says that you agree to be liable to the bank for any losses, costs or expenses the bank incurs as a result of any dispute involving your account and that you authorize the bank to deduct any such losses, costs or expenses from your account without prior notice to you.
In June, the credit ratings of 15 major banks were lowered. The ratings of Bank of America and Citibank are now just two notches above junk ratings. That means their customers may be charged higher rates for loans. Morgan Stanley was downgraded by three levels.
The Consumer Federation said that banks accounted for the largest number of consumer complaints in 2011. Bank of America led the way with 13 percent of the complaints, mostly about credit cards.
A new online database for complaints against the banks and credit cards is planned by the federal government. Consumers will be able to see which banks receive complaints. This will allow consumers to use the information in choosing where to bank or open credit cards. It will be searchable by ZIP code and will also include the banks’ responses to the complaints.
As they say, read the fine print first.
Kevin Stein of the California Reinvestment Coalition has been working on legislation to ban dual tracking for several years.