When a market collapses, the fallout typically includes very public investigations into financial misdeeds that flew under the radar while everyone was profitable and happy.
In the case of the subprime implosion, enter the U.S. Department of Justice. In a wide-ranging action, Justice is suing Countrywide in a number of states for lending violations, while at the same time moving against a $325,000 settlement negotiated by Countrywide and a Chapter 13 Bankruptcy trustee in Pennsylvania.
The Countrywide saga reveals the lengths to which a volume business is exposed to a predatory lending dragnet. Any lender that made loans even nominally beyond the means of its borrowers can find itself in a courtroom. "If I'm a lender and I have a reasonably good reason to expect that a borrower won't be able to pay for a loan, it's predatory lending if the lender still makes that loan," says Richard Beidl, a San Diego-based mortgage consultant. "It's also predatory lending if a lender is making it harder for a borrower to live up to the terms of the loan."
The Department of Justice - which is suing Countrywide in Florida, Georgia and Ohio over allegations of abuse in bankruptcy and foreclosure processes - is concerned that the settlement negotiated in Pennsylvania might impede or constrain its broader probe of the former mortgage giant, which has been acquired by Bank of America.
So that settlement's been tossed out by Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh, who ordered both sides to address his concerns regarding the settlement before an October 2 status conference.
The issues raised in Agresti's order didn't touch the Justice Department's concerns-that the settlement, and specifically a nondisparagement clause that is included in the settlement, would hobble its investigation-but the judge did say he is "not comfortable" with the deal.
Shirley Norton, a spokesperson for Bank of America, said the institution would not comment because the matter is still in court. "We are working with the trustee to address the issues raised in that hearing and have agreed to remove the nondisparagement provision," she said in a statement.
Countrywide had originally agreed to pay the $325k to the Pittsburgh Chapter 13 bankruptcy trustee. The settlement covered litigation in almost 300 separate cases, as well as legal costs. The Trustee, Rhonda Winnecour, did not return calls, but in court papers said Countrywide made inaccurate claims and charged improper fees. She also said the lender destroyed or "lost" more than $500,000 in checks paid by homeowners in foreclosure.
Agresti, who would also not comment, wrote that the parties were only "agreeing to agree" on how to help the borrowers, with no impetus to come to a final resolution. He added the settlement leaves room for future contingencies. Another point of contention for the judge, who says he remains open to a settlement under improved terms, was the agreement that the entire $325k go to the trustee, rather than having 33 percent go to the borrowers' lawyers, as was originally proposed by Winnecour.
The Countrywide case could shine a public light on the dubious level of risk posed by some mortgage products spawned by the subprime lending expansion of the past decade. A lapse in disclosure to consumers regarding higher-risk loans like ARMs can place a lender in hot water with the Truth in Lending Act, Real Estate Settlement Procedures Act and Fair Lending Act.
Two such popular mortgage products among subprime lenders were the 3-27, a three-year fixed-rate mortgage that becomes a 27-year variable rate loan; or a 2-28, which is a two-year fixed-rate mortgage that becomes a 28-year variable rate loan. These often become unaffordable to borrowers after the fixed-rate term expires.
"If your first rate was at 10 percent, then it goes to 12 or 13 percent, it's going to kill you," Beidl says. "If a lender doesn't disclose the risk in a product like that and the downside potential for the borrower to get that borrower to accept the loan, it's fraud. And if the lender simply doesn't do a good job of explaining the loan, then it's a civil matter." (c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.americanbanker.com/usb.html/ http://www.sourcemedia.com/