Bank of America's (BAC) move to settle federal charges that its Countrywide unit gouged homeowners facing foreclosure should mark the beginning, not the end, of a full-blown government crackdown on mortgage lenders. That's because the practices Countrywide is accused of -- which range from raising the cost of property inspections, to lying to borrowers about how much they owed, to charging $300 to mow the lawn -- are endemic among loan servicers.
"The Countrywide settlement exposes a widespread and longstanding industry practice," Diane Thompson, an attorney with the National Consumer Law Center, told me in an email message. "The settlement offers some real hope of reining in the worst abuses in bankruptcy court -- by requiring Countrywide to verify the amount owed and make sure they are charging reasonable rates -- and should help reaffirm what is, I believe, already the law: You can't put people in foreclosure who aren't in default, and you shouldn't overcharge homeowners in default for bogus servicers."
Homeowners' chief complaints in trying to stave off foreclosure run the gamut:
- Charging fees for services not performed, or fines not actually due. Sometimes, lenders make extra cash by charging imaginary fees that are totally unwarranted. Mortgage documents and mathematical calculations can be complicated, so many consumers are unable to figure out when they're being bilked. At the mercy of mortgage companies, they often overpay, even while facing foreclosure and bankruptcy.
- Overstating the balance owed on a home loan. University research into recent foreclosure data found that almost half of the loans analyzed in the study included inflated balances or vague, unspecified charges. In more than 90 percent of the cases, homeowners disagreed with mortgage company calculations, believing that they were both inaccurate and too high.
- Accumulating various fees or charges that are intentionally erroneous. Most of the fees mentioned in the study were relatively small, but they added up to gigantic amounts of extra profit for those companies who collect them. If a lender has, for example, 200,000 customers across the U.S. and overcharges each of them by $100, it adds up to additional revenue of $20 million -- for basically doing nothing.
- Failing to follow basic industry regulations. Investigators have found that some mortgage lenders are so negligent or sloppy, they don't even comply with the most fundamental rules and regulations. A lender is required, for example, to show documented proof that they're the actual mortgage holder before attempting to collect payments from a homeowner.
"The size of the judgment is justified in light of Countrywide's callous conduct, which took advantage of consumers already at the end of their financial rope," FTC Chairman Jon Leibowitz said.Despite the small fine, however, the agreement gives regulators leverage to identify similar violations at other lenders and servicers. And Countrywide isn't an aberration. In February, just to cite one example, customers of OneWest Bank (aka IndyMac) sued the California company for allegedly pushing them into foreclosure by illegally raising their mortgage payments after they'd declared bankruptcy.
As the FTC noted in announcing the settlement, it files such complaints when it has "reason to believe" that the law is being broken. That's a fairly low legal standard for pursuing a case, since a court doesn't need to find a lender guilty of anything to stop it from cheating borrowers. And yet such orders have the full force of law of behind them.
To their credit, the feds have launched a task force -- StopFraud.gov -- aimed at rooting out predatory lending, foreclosure scams and other crimes. They also created a unit within the Justice Department to promote fair lending. Some states are also moving to protect homeowners. California lawmakers have proposed a bill that prohibits lenders and loan servicers from foreclosing until after a borrower has been rejected for loan modification.
The problem is the magnitude of the crisis, which dwarfs the government's response. Although foreclosures appear to have plateaued, the number of borrowers at risk of losing their homes remains at levels unseen since the Great Depression -- in April, one out of every 387 U.S. housing units received a foreclosure filing, while banks repossessed more than 92,000 properties. A related issue is that lenders still routinely ignore federal guidelines for people seeking mortgage relief under the government's flagship Home Affordable Modification Program. Nearly 40,000 borrowers complained about loan servicers failing to comply with HAMP, according to a recent report.
Meanwhile, the Countrywide settlement covers a whopping 200,000 customers. The obvious question: How many additional homeowners are getting ripped off by other lenders?
Image from Flickr user Respres via Wikimedia Commons, CC 2.0
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