Bar News - December 14, 2007
Battling Predatory Lenders: Attorneys, Regulators Differ on Tactics
By: Craig Sander
As the number of foreclosures resulting from high-risk mortgage lending practices climb in New Hampshire and nationally, attorneys say they lack the tools to protect clients victimized by predatory lenders in the Granite State.
“From 2005 to 2006, the number of homes lost to foreclosures in New Hampshire doubled from 495 to 1056. This trend is sure to continue through 2007 because of the number of adjustable-rate mortgages out there and the declining value of the real estate market,” said Peter Wright, Professor and Director of Clinical Programs at the Franklin Pierce Law Center. “From the number of calls my clinic receives weekly, my sense is that these numbers will probably be quadrupling.”
Several NH attorneys are seeking to protect clients from losing their homes to foreclosure by taking legal action against their lenders and are frustrated by the lack of strong federal and state laws to protect consumers, saying regulators are not being tough enough on lenders. The NH Banking Commissioner, Peter Hildreth, says his office is trying to strike the right balance between protecting consumers and not stifling access to credit for many borrowers. Hildreth adds that many mortgage lenders, due to overlapping federal and state regulation of financial institutions, fall outside the jurisdiction of his agency.
The laws most often cited in these cases are:
- RSA 358-A – The state’s Unfair Trade Act. It ensures that companies do not take advantage of the state’s consumers. Any company found violating these practices is subject to paying triple damages and attorney’s fees. RSA 358-A:3 exempts from the Unfair Trade Act any company that is subject to the jurisdiction of the bank commissioner, the director of securities regulation, the insurance commissioner, the public utilities commission, the financial institutions and insurance regulators of other states, or federal banking or securities regulators who possess the authority to regulate unfair or deceptive trade practices.
- RSA 383 – This chapter sets up the banking commission and section 10d of this chapter gives the banking commissioner authority to investigate and penalize conduct that is or may be an unfair or deceptive act or practice under RSA 358-A and exempt under RSA 358-A:3, I.
- Truth in Lending Act, 15 U.S.C. 1600 et seq. – This law requires clear disclosure of key terms of the lending arrangement and all costs associated with the agreement.
“New Hampshire law affords very limited protection against sharp lending practices and enforcement is often relegated to the NH Banking Department,” Wright said. “And while [the Banking Commission] has a dedicated staff that is making inroads on unfair lending practices, they generally are not able to represent individuals in these cases.”
Hildreth said his department does have tools to impose sanctions and obtain restitution for victims in some cases. Hildreth cites RSA 383:10d as giving his department the authority to hold hearings and order restitution for victims of institutions that have used unfair and/or deceptive practices. In the case of criminal offenses, the matter is referred to the department of justice.
However, the Banking Department’s regulatory powers are less effective than the remedies available under the state’s Unfair Trade Act, which allows the awarding of triple damages and attorney’s fees, says Edward K. O’Brien, a sole-practitioner in Manchester. O’Brien is currently involved in several cases in which lending companies breached their contracts with consumers and says that the Banking Department is not working hard enough to protect consumers, when compared to the actions of regulators in other states, including Massachusetts.
“We’re protecting businesses; predatory, out-of-state businesses that take their money out-of-state and as a result, legitimate state lenders are losing out,” said O’Brien, who also stressed the need to protect “sub-prime” consumers who are not always financially educated. “If we don’t protect these people, then we have to support them. Like it or not, it’s in the taxpayers’ interest to make sure that predators aren’t using New Hampshire as a hunting ground, where they take the assets and leave the state.”
Commissioner Hildreth, however, said that although there were some companies whose tactics fall into a “legal gray area” – such as not factoring tax and insurance into the monthly payments until the closing of the loan – it does not mean that the whole system should be upturned and exemptions removed.
“There has to be a balance between protecting people and putting them in a home. A lot of these people that have taken sub-prime mortgages are able to pay for them,” Hildreth said. “If it weren’t for these loans, there would be even more people without homes.”
Hildreth agrees that it can be difficult for a consumer who believes that he/she is the victim of a predatory lender to understand the process for fighting back. For instance, where a consumer issues a complaint depends on the agency that regulates the lender. Some lenders are regulated by the federal government, while others are state-licensed and fall under the jurisdiction of the NH Banking Department.
“We aren’t going to be able to regulate companies that are already federally regulated by the Office of the Comptroller of the Currency, the Office of Thrift Supervision or the Conference of State Bank Supervisors,” Hildreth said. “But if we have jurisdiction over an agency, we have the tools we need. If they are national institutions we will forward complaints to them, for instance, through the OCC Ombudsman. We reach out and do what we can.”
Consumer advocate attorneys would doubtless like to see the exemption of these institutions lifted but that is unlikely to happen. New Hampshire’s Legislature has already turned down previous bills that attempted to shift power to the consumer and to consumer advocates, said O’Brien. He cited the recent growth of the payday loan industry, which lobbied, and succeeded, in getting interest-rate caps removed by the New Hampshire Legislature in 1999.
“There’s so much business-protective legislation, not consumer protection. I had a client; she had three minor children, the husband ditched her, she has a job, she isn’t on welfare, and she took out a loan,” said O’Brien. “There were 25 points upfront, on top of 18 percent interest and now she’s going through a foreclosure. We’ve got to do something.”
According to Hildreth, the banking department is working on the development of a couple of new techniques for targeting unfair and deceptive lenders. One option, currently being used is to pursue the principals of a company rather than the corporate entity itself. He also stressed the importance of dealing with originators of loans, those who actually solicit the customers, draft contracts and act between the consumer and the lender.
A new bill before the House of Representatives – HB 1126 –requires that all loan originators be licensed by the NH Banking Department. Currently, New Hampshire and Rhode Island are the only states in New England that do not already require a loan originator’s license.
“Part of the problem is that we don’t have control over the loan originators. They move around and we don’t know where they go,” said Hildreth. “But the new legislation will force these originators to be licensed. Then we’ll be able to track them.”
Hildreth said that overall, the banking department is making real progress and is working on stopping the predatory companies from operating in the state.
“If a consumer makes his/her case and someone has done wrong, the consumer can get restitution, but we’re not going to buy the house,” said Hildreth. “If a consumer files a complaint that fits under unfair and deceptive trade practices, we have a whole mechanism for enforcement; both with unfair lending and violation of law. There are ongoing examinations of licenses that we refer where appropriate.”
Attorneys have also been confronting a new form of predator: companies which promise to “rescue” the customer from foreclosure. These companies claim that they will purchase homes from those facing foreclosure and therefore save the customer from the financial and credit-report hit that a foreclosure would produce. Companies that make promises like this, however, often provide false relief, buying the home at drastically reduced prices and stripping the homeowner’s accrued equity from the final sale.
One such company, MAK Investments, was targeted by both attorneys and the NH Banking Department. for allegedly predatory tactics. Shortly after attorneys filed motions against the MAK Investments, the banking department moved to rescind the license of MAK Investments.
In numerous cases, MAK Investments contacted families nearing foreclosure and offered to refinance their original mortgage, attorneys say. Often it provided a “bailout loan” which would keep the families in their homes. However, once the contract was signed and the deed was transferred to MAK Investments, the company quickly began eviction proceedings, according to legal filings by debtor’s attorneys.
“In 2006 and 2007 the Pierce Law Clinic represented four families facing this problem and in all four we received favorable decisions from the Bankruptcy Court, which found that the scammer had committed multiple unfair trade practices in violation of lending laws, said Wright. “In [one case] we recovered $67,000 for the client who had lost his home to one of these operators.”
Another bill – HB 365 – was recently passed and signed into law by Gov. Lynch. The law imposes new standards for pre-foreclosure home sales and aims to protect homeowners from the operators of these scams. The law requires “greater disclosure from foreclosure consulting service companies and it creates stiff penalties for those who take advantage of homeowners,” Gov. Lynch said in a statement when the bill was signed. “The penalties include fines, jail time and even repayment of equity to the homeowner.”
Update: Shortly before press time, Banking Commissioner Hildreth announced that in response to the growing number of foreclosures in the state his department has established new requirements for state-licensed mortgage lenders and has also opened a telephone hotline for consumers dealing with mortgage difficulties. The order requires that any New Hampshire-licensed lender designate a person to be available for direct contact with the Banking Department and consumers. It also states that lenders must use clearer language in describing their standards for loans and the risks that borrowers may take on.
The Banking Department also recently opened a telephone hotline – 1-800-437-5991 - that will be answered by department staff weekdays from 8 a.m. to 4:30 p.m.