The N.J. Legislature has to date taken no action on bills to reform predatory lending. In response, the ACORN group picketed Assemblyman Neil Cohen to protest the slow progress of the bill, and brought along a couch from a foreclosed homeowner. The tactic illuminated the problem, but did not make a friend in the Legislature for ACORN: the Assemblyman then made remarks to American Banker about upholding the "200-year-old holder in due course rule" which disturbed all consumer groups. The Assemblyman is wrong- for most of the last 200 years, N.J. mortgages came with a "bond" and there was no holder in due course, because there was no "negotiable" note, and so consumers could raise their defenses, such as fraud.
The "holder in due course" rule, for certain "negotiable" notes, but not all mortgages, makes it very difficult for those defrauded to complain in Court. So if lender A defrauds the homeowner, but is able to make its note "negotiable," and then lender A sells the note and mortgage to lender B, then the consumer cannot do anything to protest A's fraud when lender B forecloses and takes away the home. The rumor is that the banks intend to "turn" bills to their purposes, to make it harder for homeowners to complain about acts of predatory lending.
Eliminating the holder in due course rule from mortgage lending is an absolute necessity - else lenders can laugh at any laws enacted. N.J.'s Courts must be free to exercise their traditional equity powers, to refuse to foreclose fraudulent mortgages. For 1000 years, courts of equity required lenders to have "clean hands" before a mortgage could be foreclosed. Eliminating consumer defenses would be a radical change.
For more information about predatory lending, and a how to get a new book which explains it, see below.
Congress for Sale?
Bankruptcy Bill Deadlock?
Will Congress break the deadlock on the bad bankruptcy bills, S.420/HR333? The legislators are asking the wrong questions. Instead of debating whether the torts of abortion protestors will be forgiven in bankruptcy (the current deadlock), Congress should simply reject the bills altogether.
The deadlock is good if it results in no bankruptcy bill this year. These bills are a quid pro quo for creditors who contributed heavily to Congress. When banks send out a billion unsolicited credit card offers, they fully expect to get a million bankrupts, and charge accordingly. Congress should rein in these credit card offers first.
The bills are bad because they force all debtors, even those below the poverty guidelines, to make a useless trip to credit counselors, to discuss impossible payment plans. For debtors above the state median family income, the bills force them into Chapter 13, bankruptcy payment plans. However, by increasing the number of debts which must be paid in full, the bills make Chapter 13 payments plans too expensive. This is the Catch 22: debtors are rejected for Chapter 7 (debt forgiveness) because they must go into Chapter 13. But they will be dismissed from Chapter 13 because they do not have enough money to pay more creditors in "full." The bills will make it harder for homeowners to save their homes from foreclosure in Chapter 13 because Chapter 13 will be too expensive. There are punishments for attorneys too, if a bankruptcy is converted to chapter 13. Shame on Senator Torricelli for sponsoring this bill.
Even after the "compromise," millionaire bankrupts in Texas and Florida will still be able to keep their mansions in bankruptcy. So Enron executives who own $7 million homes in Texas (and OJ in Florida) will keep them if they file, so long as they have lived in the state for 40 months and are not convicted of a crime or a securities law violation.
Alain Liebman, of the U.S. Attorney's Office, Newark, recently obtained two more convictions arising out of the Monmouth County "land-flipping" scam. Two realtors joined apx. a dozen others convicted since the 1997 scandals. The Asbury Park Press, in an award-winning 1997 series "House of Cards" turned the spotlight on a network of realtors, appraisers, developers who bought run-down properties in Asbury Park, then with the help of phoney appraisals, sold the house for double their worth to first time home buyers. The land-flips, in which the property values doubled overnight, were financed by mortgages from Walsh Securities, Inc., a Parsippany mortgage lending firm, which seems to have gone out of business. The homeowners were left with large mortgages on rundown properties, too overvalued to sell. Some Walsh Securities employees have pleaded guilty too.
What did Walsh Securities do with these mortgages? While predatory lending is unsound lending, predatory lenders prosper by taking, for example $8,000 of upfront points and fees, then selling the loan to another lender or investor. Predatory lenders always get rid of the loan. You can see why applying a "holder in due course" rule to mortgages would mean that homeowners couldn't complain about being swindled. Walsh Securities often packaged loans into mortgage securities, and sold them to investors with the help of Wall Street firms. On the West Coast, Lehman Brothers has been sued because of its involvement with First Alliance Mortgage, another predatory lender. A Federal Judge in California says Lehman Brothers is potentially liable for its alleged involvement in financing the predatory loans of FAMCO. Can you believe that some lenders are still trying to foreclose Walsh mortgages?
How can New Jersey stop predatory lending? Make it unprofitable. Make the assignees and financiers of fraud liable to pay damages. Then Wall Street will stop financing fraud.
STOP Predatory Lending
The National Consumer Law Center, Boston, has published STOP Predatory Lending, A Guide for Legal Advocates. This volume charts the history and background of predatory lending, and identifies the players by function. The book outlines steps which attorneys can take to defend homeowners in foreclosure, or to bring affirmative suits against the predators and those who finance the scams. The book outlines the numerous laws which apply to mortgage lending, such as simplified view of the Truth in Lending Act and HOEPA, and details the practical steps such as what loan documents to look for, etc. The book is a condensation of the principles found in the NCLC's multi-volume practice series. To obtain copies, call the NCLC at 617-542-9595, or on the web at www.consumerlaw.org.
Judgment for $228,000
in Predatory Lending Case
Patricia Timlen of Hudson County Legal Services recently obtained a judgment for $228,000 against a Hudson County resident in another land-flipping scheme. Guess who was involved with the mortgage? That's right, Walsh Securities, Inc. The Hudson scheme was similar to the Monmouth scheme, but with different actors.
State Sues Land-flippers in Essex County
The N.J. Attorney General has sued Barry C. Fauntleroy, alleging that this graduate of Monmouth land-flipping scams started his own scheme in Essex County. The State charged violations of the N.J. Consumer Fraud Act, unconscionable conduct, and discrimination against several hundred minority homebuyers. The suit alleges a conspiracy among appraisers, developers and mortgage lenders to falsify loan documents and falsely promise repairs on the dilapidated homes they sold and mortgaged. Many of the mortgages were guaranteed by the US Dept. of HUD. The homeowner now have furnaces which do not heat, collapsing roofs, and the threat of eventual foreclosure.
N.J. bill S.1200 (Buono) has many excellent ideas to curb predatory lending. The bill holds the financiers of fraud liable to all claims and defenses which the homeowner has in a high cost mortgage against the original lender or home repair contractor. The bill clarifies that a homeowner may use the Truth in Lending right of rescission at any time to stop a foreclosure. A high cost mortgage is defined as one in which: the interest rate is 6 points above Treasury rate, or more than 5 points of fees/points are charged, or has a prepayment penalty exceeding 2%.
S.1200 prohibits predatory lenders from financing the points
and fees. These fees are the reason lenders repeatedly refinance
loans from debtors in default. It prohibits the financing of
credit insurance, an abuse when large premiums are financed over
30 years. The bill prohibits "flipping," i.e. the refinancing
of a loan where there is no "tangible net benefit"
to the consumer. The bill prohibits balloon payments, as these
are inserted to force refinancing (and another round of fees).
The bill prohibits negative amortization and mandatory arbitration
clauses. Before making a high cost loan, the homeowner would
be advised by a HUD-certified counselor. The loan must not be
made to persons who cannot pay them back. Currently lending to
the poor, who are certain to default, is a favorite tactic- it
causes the homeowner to pay points repeatedly with each loan.
Loans are often based solely on the amount of equity (poor seniors
with paid-off mortgages, for example), disregarding that the
homeowner cannot possibly pay a loan equal to her entire monthly
Chester Wins Appeal
CLNJ Vice President Gail Chester won an important appeal, overturning a Middlesex County judge's refusal to apply the UCC deadline for repossession suits. In Ford Motor Credit v. Arce, the N.J. Appellate Division held that the deadline to sue was four years from defaul in credit sales. Some collection attorneys brazenly bring suit even when their deadlines have passed.
Rent to Own Cy Pres Award
After the class action against RentaCenter et al in N.J. was settled, some funds remained which could not be returned to victims who had moved. Consumer attorneys Donna Siegel Moffa and Lisa Rodriguez negotiated a cy pres award of funds to charities which represent poor consumers in Court, namely to Hudson County Legal Services Corp., Camden Regional Legal Services, law school clinics, and to NACA. These organizations will no doubt put the funds to good use.
CLNJ Joins ACCO
Consumers League of New Jersey is a founding member of the American Congress of Consumer Organizations. ACCO is an umbrella group whose purpose is to promote and endorse model legislation, from the consumer's point of view. Too often the persons who draft "uniform" laws are persons who represent banks. The Uniform Commercial Code, for example, contains a fundamental inequity in that a person who gives her car back to a finance company not only loses the entire value of the car, but she has to pay for the car which she just gave back! In contrast, the ACCO will write pro-consumer model legislation, and present it to state legislatures and Congress.
Some of the organizations which belong to ACCO are AARP, the Consumer Federation of America, USPIRG, and Consumers Union.
The National Consumer Law Center, Boston, is handling the administrative chores for ACCO for the time being
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