I do not believe that one federal Consumer Financial Protection Agency would have more power than 50 attorneys general and private attorneys enforcing state consumer protection laws against banks. Washington state was only able to stop predatory lending practices against Ameriquest and Household Finance on behalf of state residents because those companies were not federally insured banks. If our Attorney General had been able to sue WAMU on behalf of Washington state citizens or other banks that were swindling their clients, perhaps there would not have been a financial meltdown that almost caused another great depression.

For more information, see these articles from the Huffington Post‘s Stacy Mitchell:

• What Big Banks Fear More Than the CPA
• Five Reasons the Carper Amendment Must Be Defeated

Payday lenders and check cashers fight financial reform legislation in Congress

Payday lenders and check cashers blanketed Capitol Hill last week to challenge the scope of the financial reforms under debate in Congress and combat the industry’s reputation as the pariahs of the financial system.

During the “Hill Blitz” organized by the Financial Service Centers of America, a trade group, about 40 industry executives pushed to exempt check cashing from the purview of a proposed bureau that would oversee consumer financial products. Meanwhile, Democrats launched a new effort to contain the industry by limiting the number of payday loans that consumers can take out.

Reuters economic blogger Felix Salmon notes the inherent ridiculousness of passing “regulatory” legislation that would specifically exempt some of the worst offenders.

Investors, including pension funds and mutual funds, often hold the first mortgages. Banks often hold home-equity loans and other second mortgages. Investors reasonably believe that second liens should be reduced before the primary mortgage is modified, but banks balk at that because it would prompt write-offs they don’t want.

Fortunately, investors are getting tired of this foot-dragging:

Some investors, notably the powerhouse group BlackRock, have called for a special bankruptcy process to resolve the standoff. The court would seek to reduce bankrupt borrowers’ total debt to affordable levels, starting with unsecured debt like credit cards, then undersecured debt, like second mortgages, and then, if necessary, the primary mortgage debt.

Giving bankruptcy judges permission to modify the terms of mortgage loans–isn’t that what we’ve been saying for years? Maybe this time the message will get through to Congress and the administration.

According to the Times article, the Obama administration’s foreclosure program, which provides a $1,000 incentive to servicers for each loan they modify (plus $1,000 a year for the next three years) is no match for the revenue generated from delinquencies and foreclosures:

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month.  “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

What’s more, the article reports, some mortgage companies (Ocwen, for example) have established their own title companies in order to keep more of the revenue from foreclosures. 

Scary stuff, but kudos to the Times for shedding light on these dark dealings.

(Please don’t let this post stop you from trying to get a modification…many people have successfully lowered their mortgage payments! The loan modification and forbearance section of our website can help you get started.)

House Financial Services Committee Chairman Barney Frank threatened to revive the mortgage “cram- down” bill that stalled in Congress this year, saying lenders aren’t being aggressive enough in modifying troubled home loans.

Cram-downs let federal judges lengthen terms, cut interest rates and reduce mortgage balances of bankrupt homeowners, even if the lender objects. Congress gave the mortgage industry every legislative tool it requested to allow them to more easily modify loans for those facing foreclosure, and the results have been below expectations, Frank said in a statement today.

“People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different,” Frank, a Massachusetts Democrat, said.

Great news, if it happens. Meanwhile, last night’s Daily Show brought us the story of one particular man who might want to take advantage of such an option:

Our interest in the Meadows decision was piqued a few months ago when one of our Chapter 7 bankruptcy clients was the victim of a payday lender who took the money from her account over a month after we filed the bankruptcy case. We are currently fighting this in the bankruptcy court and hope that our judge will conclude that a post-dated check given in exchange for a payday loan is nothing more than collateral that cannot be seized during the automatic stay. Washington is not in the Sixth Circuit, so we’re hopeful that the judge will not be guided by the Meadows decision and will recognize that the action taken by the payday lender was unlawful. We will keep you up to date and informed on how the case turns out.

Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

Yves notes that most of the mods that lenders are offering today involve interest rate reductions and lengthening maturities, which aren’t as successful as mods that reduce the principal owed. Unfortunately, principal reduction is rarely offered due to the way most mortgages today are securitized (i.e., cut up into pieces and sold to far-flung investors). The only thing that is likely to reverse this trend of increasing modification failures is if bankruptcy judges are given the power to rewrite loan terms.