the subprime mortgage market

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TA B L E O F C ONTENTS 2 Acknowledgments 3 Executive Summary 7 Context 9 The Evolving Mortgage Market and “Traditional” Risks 13 The Subprime Mortgage Market 19 Abusive Lending Practices 23 A Dramatic Increase in Pennsylvania Foreclosures 28 Efforts to Curb Abusive Lending Practices 35 Recommendations for Pennsylvania Action Appendices 45 47 52 A: House Resolution 364 B: An Overview of HEMAP C: Description of the Foreclosure Process in Pennsylvania 59 D: Some Local Efforts to Curb Abusive Lending Practices in Pennsylvania 65 E: Core Curriculum Elements for Pre‐Purchase Homeownership Education and Counseling 67 Endnotes Pennsylvania Department of Banking
333 Market Street, 16th Floor
Harrisburg, PA 17101-2290
www.banking.state.pa.us
A CKNOWLEDGEMENTS This report to the General Assembly was framed by discussion and interaction with the Advisory Committee to the Statewide Foreclosure Study. The members of the Advisory Committee spent many hours discussing the structure of the study, providing valuable contacts and insight on methodologies, and reviewing information provided by the Reinvestment Fund and the Department of Banking. They expressed their views, shaped by knowledge and experience; however, the opinions expressed in this report are not necessarily the opinions of the Advisory Committee, its individual members, or their organizations. The Department of Banking is grateful for their involvement and thanks the Advisory Committee for creating the context for the Department’s formulation of its recommendations. The Department of Banking also acknowledges the significant contributions of Pennsylvania Housing Finance Agency staff in helping to research and draft this Report. M E M B E R S O F T H E A D V I S O R Y C O M M I T T E E − George Hanzimanolis, Pennsylvania Association of Mortgage Brokers −
Brian A. Hudson, Sr., Pennsylvania Housing Finance Agency −
Alan L. Jennings, Community Action Committee of the Lehigh Valley −
E. Robert Levy, Joint Council of the Mortgage Bankers Association of Pennsylvania and the Pennsylvania Association of Mortgage Brokers −
Joseph J. McGettigan, Pennsylvania Real Estate Commission −
Samuel Morelli, Mortgage Bankers Association of Pennsylvania and Sunset Mortgage Company, LP −
Dede Myers, Federal Reserve Bank of Philadelphia −
Craig Roda, Pennsylvania Bankers Association and Fulton Mortgage Co. −
Pete Schaaf, Pennsylvania Financial Services Association −
Greg Simmons, Pittsburgh Community Reinvestment Group −
Alan White, Community Legal Services, Inc., Philadelphia −
David Zuern, Pennsylvania Bankers Association and Sovereign Bank In addition, The Reinvestment Fund (TRF) was retained by the Department of Banking to conduct a study of foreclosures statewide, and its study is included in this Report. The Department of Banking thanks TRF’s Ira Goldstein, director, Public Policy and Program Assessment; Maggie McCullough, assistant director, Public Policy and Program Assessment; Daniel Ackelsburg, policy analyst, Public Policy and Program Assessment, and Al Parker, data librarian, Public Policy and Program Assessment, for the substantial time and energy they invested in producing the study. Losing the American Dream:
A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania
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E X EC U T IV E S U MMARY Directed by House Resolution 364, the Pennsylvania Department of Banking conducted a study of residential lending in Pennsylvania, identified trends in foreclosures, and documented lending practices that are disadvantageous to Pennsylvania consumers. This Report includes information from several sources. The Reinvestment Fund (TRF) was retained by the Department of Banking to conduct a study of mortgage foreclosures across the Commonwealth. In addition, the Department of Banking reviewed the experience of its Examinations and Investigations and Consumer Services Divisions, worked with the Department of State to address appraisal issues, and sought out the opinions and advice of residential lending industry representatives and consumer groups. The findings and proposed actions will impact the residential mortgage industry in Pennsylvania to better protect vulnerable consumers and promote the health of the residential lending market. Foreclosures in Pennsylvania have skyrocketed, and Foreclosures in subprime loans represent the majority of loans that result in Pennsylvania have the filing of a foreclosure action. As reported by the Mortgage Bankers Association, Pennsylvania’s prime loan skyrocketed. foreclosure rate of 0.85 percent ranks it as ninth highest in the Subprime loans nation. The subprime foreclosure rate in Pennsylvania is 11.9 represent the majority percent, making it the fourth highest rate in the nation. In that result in 2002, subprime lenders made 9.9 percent of all loans originated in Pennsylvania, and 60 percent of foreclosure foreclosure action. filings were for subprime loans. Many factors led to these foreclosures, including abusive lending practices. While government cannot intervene in some of the traditional reasons for mortgage foreclosures such as job loss, divorce, or medical expenses, it can reduce abusive lending activity and, subsequently, reduce the number of foreclosures. A number of administrative and legislative actions, when enacted, could have an immediate impact on abusive lending practices in Pennsylvania. ACTION STEP: The Department of Banking is building the enforcement capability of the agency. In 2003, the Department of Banking reorganized its operations to become a more effective enforcement agency. This included consolidating all examination, supervision and enforcement functions under one deputate, expanding the Licensing Division to ensure effective background checks, creating an Investigations Unit, and expanding the capabilities of the Consumer Services Division. This has positioned the Department to have a stronger profile within the industries it regulates and will provide more avenues for consumer protection. Losing the American Dream:
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ACTION STEP: The Department of Banking is recommending that the General Assembly strengthen certain laws and regulations that protect consumers. Several laws enacted to protect consumers have not kept pace with the markets and activities they were intended to cover, and legislative action to update them, including: • Amend the Loan Interest and Protection Law of 1974 (Act 6) to: − Tie the monetary cap that restricts the coverage of Act 6 to the Federal Housing Administration’s annual mortgage insurance limits for Pennsylvania. − Provide the Department of Banking with enforcement authority, in addition to the existing authority of the Office of Attorney General. • Amend Chapter 3 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (MBBCEPA) to: − Create a new licensing category for individual mortgage loan solicitors. − Create a pre‐licensing education and certification requirement for mortgage brokers and loan solicitors. − Eliminate the “Builder” and “Real Estate Agent” licensing exceptions in Chapter 3 and amend the “Employee” exception to account for loan solicitor licensing. • Amend the Secondary Mortgage Loan Act (SMLA) to: − Strengthen its licensing and enforcement provisions to mirror the licensing and enforcement provisions in the MBBCEPA. − Create a new licensing category for individual mortgage loan solicitors. − Create a pre‐licensing education and certification requirement for mortgage brokers and loan solicitors. • Amend Section 302.A (5) of the Department of Banking Code to allow the Department to make public non‐depository consumer complaint and enforcement information about specific entities. • Amend the Pennsylvania Housing Finance Agency legislation to: − Require lenders to provide Act 91 foreclosure notices to create a tracking database. − Extend the agency’s temporary stay of foreclosures to include the agency’s administrative appeal. − Revise the Act 91 Notice to include more information. − Impose a requirement on lenders to provide loan reinstatement figures in a timely manner. Losing the American Dream:
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Tie attorney fees paid through HEMAP to the Fannie Mae guidelines on attorneys’ fees for Pennsylvania. Reduce the interest rate on a HEMAP loan to the Act 6 residential mortgage rate. −
Amend the Appraiser Board legislation to: −
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Include the Department of Banking and the Office of Attorney General on the Appraiser Board. Increase the State Board of Certified Real Estate Appraiser maximum civil penalty from $1,000 to $10,000 for each violation. Authorize the State Board to take disciplinary action against certified real estate appraisers whose rights to practice before any state or federal agency are suspended or revoked. Authorize the State Board to take disciplinary action against certified real estate appraisers who have been found by a civil court of competent jurisdiction to have performed a fraudulent appraisal. ACTION STEP: The Department of Banking, the Office of Financial Education, and the Pennsylvania Housing Finance Agency will expand their consumer education operations. A well‐informed consumer is less of a target for marketing inappropriate or high‐risk lending products. Some abusive lending tactics include: lending without regard to the borrower’s ability to pay, falsifying information in connection with a loan application, hiding or inadequately explaining fees, costs or rates being charged, inflating appraisals and preying on vulnerable and desperate homeowners. The Department of Banking has taken the following steps to address the risks that vulnerable consumers face in the marketplace: • Expanding the activities of the Commonwealth’s Office of Financial Education, presently housed and funded by the Department of Banking, to develop or expand programs in schools, the workplace, and the community. • Strengthening the network of counseling agencies established by the Pennsylvania Housing Finance Agency to insure coverage throughout the Commonwealth. • Defining the network of agencies that can provide support to individuals who contact the Department of Banking Consumer Services helpline, 1‐800‐PA‐BANKS, to provide personal referrals to help vulnerable consumers find assistance with making appropriate financial decisions. Losing the American Dream:
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ACTION STEP: The Department of Banking will issue new policies, based on its statutory authority, that will then be drafted as regulations and, with the support of the General Assembly, increase the Department’s authority to oversee lenders in the marketplace. • The Department of Banking will define dishonest, fraudulent, unfair/unethical and illegal practices under the Mortgage Brokers and Secondary Mortgage Loan Acts to make it clear to both industry representatives and consumers the practices that are acceptable and those that will not be tolerated. However, some lenders in Pennsylvania’s residential marketplace are not governed by state law as a result of federal preemption and the lenders of nationally chartered banks, savings and loans and credit unions, or their subsidiaries may not fall under state jurisdiction. ACTION STEP: The Department of Banking will institute a “best practices” program. • The Department of Banking will develop a list of best practices for mortgage brokers, lenders, and servicers and ask for voluntary compliance by the industry, including those institutions that are not regulated by state law due to federal preemption. ACTION STEP: The Department of Banking recommends that the General Assembly study, with the Department’s input, several other issues to stem the tide of residential mortgage foreclosures, including: • Pre‐closing counseling for consumers of high cost, subprime loans. The timing of the counseling, cost of providing the counseling, and the availability and licensing of counselors are all ingredients of an effective delivery system. • An Emergency Fund for the Victims of Abusive Lending. The new fund could operate in a similar fashion to the Real Estate Recovery Fund or other funds created to help consumers harmed by the actions of licensed professionals. • A comprehensive review of the mortgage foreclosure process in Pennsylvania. Consumer groups and others have noted how the foreclosure process allows few avenues for homeowners to try to save their homes. The process also puts much pressure on the county sheriffs’ offices. • A comprehensive review of the effectiveness of Chapter 5 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act. • A requirement to be sure that recorded mortgages include the parties to the origination of the loan, i.e. the mortgage broker, appraiser and originating lender. Losing the American Dream:
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C O N T EX T It’s not a cliché: owning one’s own home is still the American dream. Pride and satisfaction come from owning—rather than renting—a home. Studies show that homeownership is good for families and helps build more stable and safe neighborhoods. Owning a home is like an automatic savings account, with each payment building more equity in the owner’s future. Additional financial benefits often accrue as well—mortgage interest and real estate property tax provisions often reduce the owner’s overall tax bill, for example. The good news is that the United States’ homeownership rate is close to 70 percent.1 But, for an increasing number of families, the bad news is that achieving the American dream is actually the first step on the road to living through the American nightmare of foreclosure and financial ruin. Unfortunately, Pennsylvania families are not exempt. Home foreclosures in Pennsylvania—as in other states across the nation—are at an all time high. In 2003, compared to the Despite the fact that Pennsylvania is the only state in other 49 states, the union to have a program specifically designed to Pennsylvania had the 9th help homeowners in danger of losing their homes,2 highest foreclosure rate an estimated 55,000 homes have been sold at sheriff sales across the Commonwealth during the past three among prime loans and years– a 14 percent increase. In 2003, compared to the the 4th highest foreclosure other 49 states, Pennsylvania had the 9th highest rate among so‐called foreclosure rate among prime loans and the 4th highest foreclosure rate among so‐called “subprime” “subprime” loans. loans. (An extensive discussion of “subprime” lending follows in the report.) Administered by the Pennsylvania Housing Finance Agency (PHFA), the Commonwealth’s Homeowner’s Emergency Mortgage Assistance Program (HEMAP),3 has saved approximately 33,000 homes from foreclosure since its inception in 1984. HEMAP received 5,413 applications for assistance in 1995, a number that soared to 8,971 in 2002.4 Application volume remained high in 2003 and is projected to continue to climb through 2004 and 2005. PHFA monitors HEMAP applications for the following lending factors that may have caused or contributed to a foreclosure; unusually high interest rate, inability to repay the loan at origination, interest rate and closing costs increased from the time of the original commitment to actual loan closing, numerous refinancings, the home mortgaged above the market value, an inflated appraisal for the property, and unusually high closing costs. Losing the American Dream:
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With growing concern over the alarming number of mortgage foreclosures and escalating number of HEMAP applications, the Pennsylvania House of Representatives urged the Commonwealth’s Secretary of Banking to study: − residential lending practices in Pennsylvania, − trends in foreclosures, and − documented lending practices disadvantageous to consumers. Passed on July 18, 2003, House Resolution 364 (199‐0) also encouraged the Secretary to provide recommendations—either legislative or administrative—to the Chief Clerk and the Chair and Minority Chair of the Commerce Committee of the House of Representatives. The pages that follow detail the growing national foreclosure problem, Pennsylvania’s specific characteristics, actions already taken by the Commonwealth to address the issue, and recommendations for appropriate state action. Losing the American Dream:
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T HE E VOLV ING M ORTGAGE M A RK E T A N D “T RA DIT ION A L” R ISKS The residential mortgage market has evolved dramatically over the last ten years. It used to be that local lenders made loans to borrowers who had good credit histories and—usually—
substantial down payments; people who did not have good credit were not approved. Thirty‐
year, fixed‐rate mortgages were the norm, and most homeowners used only one mortgage to purchase their homes. Lenders typically owned and serviced mortgages in‐house and did not sell them on the secondary market.5 Borrowers looked forward to a time when their mortgages were paid off—they could have no mortgage at all or they could use their equity to “trade up” to more expensive homes without dramatically increasing their payments. And, while not tied directly to mortgage lending, it is important to also note that the use of personal credit has evolved dramatically in recent years as well. It used to be that when people bought cars they would typically finance the purchase with personal consumer loans, secured by the car’s title. Credit card debt was unsecured. Interest on car loans and credit cards was tax deductible. Today’s mortgage market is quite different. Almost anyone can get a loan, regardless of credit history. Borrowers with Some “traditional” bad credit are not turned away, rather they are offered factors associated “subprime” mortgages that include much higher interest with foreclosure rates and higher fees.6 Adjustable rate mortgages7 and include homeowner balloon mortgages8 are common. Very few lenders that originate loans today retain ownership; instead, they sell unemployment, them on the secondary market to Fannie Mae, Freddie Mac or divorce, or an large banks that own and service hundreds of thousands of unplanned emergency loans across the country (mostly outside of Pennsylvania). with significant And, homeowners have grown accustomed to using the equity in their homes like personal piggy banks—obtaining financial consequence.
second or even third or fourth mortgages to finance home repairs, automobile purchases, pay off credit card debt, pay taxes, secure lines of credit, or finance a new business. In yesterday’s market, if a homeowner had financial difficulty that made him unable to pay all his debts, he was often able to stop paying his unsecured debt, cut back on some unnecessary living expenses, and, thus, afford his mortgage payment. His actions were not without consequences, to be sure. His credit card privileges would have been terminated, he may have had his car repossessed, and—eventually—he may have been forced to file bankruptcy. But, in all likelihood, his home would not be lost. Losing the American Dream:
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In today’s market, however, his home is in jeopardy because it was probably used to secure the car purchase (or, more likely, the purchase of more than one car), refinance the credit card debt, and the like. Financial difficulty for today’s homeowner is far more likely to result in home foreclosure than in the past. While certainly not an exhaustive list, the following are some “traditional” factors that could cause financial difficulty serious enough to start a homeowner down the path to foreclosure: • Unemployment and Underemployment. A period of unemployment, job loss, or reduction in overtime compensation can make it difficult or impossible for some homeowners to make their mortgage payments. Too often, homeowners lack substantial savings to help them get through such a financial difficulty. In Pennsylvania, job loss has been among the main reasons cited by people applying to HEMAP for assistance. During the first 12 years of the program, HEMAP application volume paralleled the unemployment rate. However, around 1995 the pattern changed and applications increased even though the unemployment rate fell. This pattern continued until approximately 2003, when there was an increase in the unemployment rate and a corresponding increase in HEMAP volume. In 2000, 53.3 percent of all approved HEMAP applicants reported that “layoff‐loss of income” was the primary cause of their financial distress. By 2003, that figure had risen to 62.8 percent. During the same period, the unemployment rate in Pennsylvania rose from 4.1 percent to 5.6 percent. Losing the American Dream:
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Divorce and Separation. In the past, some Pennsylvania HEMAP applications were denied because the mortgagors’ financial difficulties were caused by divorce or separation. From 1985‐1989,9 approximately five percent of all applications cited this reason. While the HEMAP guideline has changed since then and comparable data isn’t easy to find, it is safe to assume that divorce and separation10 are still a significant reason why some couples end up unable to pay their mortgage. The old adage that it is cheaper for two people to live together, sharing expenses, than it is to maintain two separate households is true.11 Marital discord disrupts income and savings. Attorney fees and child support are often part of the mix. Trying to collect child support is often a major source of financial distress to the custodial parent; unpaid child support can be devastating to the family budget.12 •
Unplanned Emergencies. Life is full of financial emergencies that can result in homeowners being unable to pay their mortgage(s) including: −
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Medical Problems and Health Care Costs. Nationally, between 1997 and 2002 health care costs increased by 27 percent.13 Medical problems—especially if they result in the homeowner being unable to work—have a direct impact on mortgage(s). Of the 7,762 homeowners approved for HEMAP assistance for 2000‐2003, 40.3 percent cited medical/healthcare costs and expenses as the reason for their financial difficulties. Numerous applications to HEMAP suggest that one or more of the homeowners have become disabled or been diagnosed with a life threatening illness. Some may not have reasonable prospects of ever being able to pay their mortgage; some may not be able to recognize such prospects; and some prospects may be difficult to obtain or have significant time delay in providing benefits (such as filing for and receiving Social Security disability benefits). Home Repairs and Maintenance. Homeowners should prepare for the unexpected and save on a regular basis for the maintenance and repair of their home, but few do so. This is particularly difficult for lower‐income homeowners who, even with careful stewardship of their resources, barely meet the rest of their living expenses. HEMAP sees applications in which, for example, a roof repair, new furnace, air conditioning unit, plumbing, or electrical repair can have serious financial consequences for some homeowners, causing them to become delinquent in their mortgage. They may be forced to take out a second or third mortgage to finance the cost of the home repair, which they can ill afford to do. −
Rising Home Expenses. A home purchase that is affordable at the outset may become unsustainable as a result of unexpected increases in costs without corresponding increases in income. From 2000 through 2003, at least ten percent of the applicants for HEMAP assistance could not afford to pay their mortgage Losing the American Dream:
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debt as well as other household expenses, based upon their household income. Examples of common expenses on the rise include Pennsylvania’s tax, for example, which experienced a 70 percent per capita increase between 1989 and 1999, substantially greater than the national increase of 53 percent.14 Many homeowners—especially those who do not escrow for taxes—cannot afford the additional expense. Faced with several years of delinquent taxes, some homeowners have refinanced their mortgages in an effort to save their homes, only to find that the new monthly mortgage payments may not be affordable. Home heating costs are another rising expense for homeowners; more than doubling between 1999 and 2003, with more increases projected.15 −
Financial Distress Resulting from Homeowner’s Decisions. Many foreclosures result from decisions made by the homeowner. One of the top three reasons for HEMAP application denial is that the applicant is not in financial distress because of circumstances beyond their control.16 Faulty decision making may include, but is certainly not limited to: quitting a job; spending the mortgage money on other purposes; mortgaging the home to finance a business venture that fails; refinancing the mortgage repeatedly to pay off credit card debt, or mismanaging money. A NOTE ABOUT FINANCIAL EDUCATION Some people argue that borrowers “get themselves into” financial distress by making poor choices, including choices associated with subprime mortgages. One of the best ways to reduce foreclosures and abusive lending practices will be to have a financially educated population that can plan, budget, and save a nest egg to help get through unplanned emergencies. An educated population will also be able to identify and avoid bad financial services. In April 2004, Governor Edward G. Rendell established both a Task Force for Working Families and the Commonwealth’s Office of Financial Education to augment a variety of existing services, such as PHFA’s expanded 70+ site homeownership counseling. The Office of Financial Education will create a clearinghouse of existing financial education materials and resources as well as work to improve financial education and counseling in Pennsylvania’s schools, communities, and workplaces. (See Appendix E for sample curriculum elements.) Losing the American Dream:
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T HE S U BPR IM E M ORTGAGE M A RK E T So, clearly, even before the evolution of the mortgage and Between 1993 and 1998, financial market place, there were a number of factors that subprime mortgage could cause borrowers to lose their homes. And common sense suggests that the recent weak economy and the lending increased increased co‐mingling between personal and mortgage eight‐fold, from $20 debt surely have important intersections with the increased billion to $160 billion number of foreclosures, both in Pennsylvania and across nationally. the nation. Yet there is no evidence that shows with any clarity that these two factors are the sole reasons for the growth of the American nightmare. Mixed with these factors has been a more explicit evolution of the mortgage marketplace, during which lenders have begun to make loans to a much wider array of people than ever before. Different constituencies use different terms to describe this evolution—calling it everything from the more business‐oriented “risk‐based” to more consumer‐activist “predatory” lending. Before considering the matter further, it is important to be clear about the definitions and terminology used in this report. DEFINING SUBPRIME LOANS Subprime loans can be used to purchase a home, refinance an existing mortgage, or obtain a second or third “home equity” mortgage. The term subprime17 refers to the credit characteristics of borrowers—people with weak credit histories including payment delinquencies, charge‐offs, judgments, prior foreclosure filings, and bankruptcies; and/or they may have low credit scores, high debt‐to‐income ratios or incomplete credit histories. Examples might include: • Two or more 30‐day delinquencies in the last 12 months, or one or more 60‐day delinquencies in the last 24 months; • Judgment, foreclosure, repossession, or charge‐off in the prior 24 months; • Bankruptcy in the last five years; • Relatively high default probability as evidenced by a credit bureau risk score (“FICO”) of 660 or below (depending on the product/collateral); and/or • Debt‐to‐income ratio of 50 percent or greater or otherwise limited ability to cover family living expenses after deducting total monthly debts from monthly income.18 Losing the American Dream:
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To compensate for the added credit risk presented by these sorts of credit histories, lenders charge much higher interest rates and fees on subprime loans than they do on typical—or “prime”—mortgage loans. An Economic Letter prepared for the Federal Reserve Bank of San Francisco concluded that, during the period of 1998‐2001, the subprime mortgage rate exceeded the prime mortgage rate by an average of 3.7 percentage points.19 An estimated 80 percent of the subprime market includes refinance and home equity mortgages. In most refinance cases, borrowers re‐mortgage for an amount greater than the unpaid principal balance on the original mortgage, thereby taking “cash out” of the transaction.20 According to a joint report issued by the U.S. Department of Housing and Urban development (HUD) and the U.S. Treasury Department in 2000, “more than three out of every four loans in the subprime mortgage market were first liens . . . The vast majority of these subprime first lien mortgages – 82 percent – were used for refinancing as opposed to purchasing a home. Of these refinance loans, a majority, or 59 percent, were “cash out,” meaning that borrowers used these loans for home improvement, for making other consumer purchases or consolidating other forms of debt.”21 GROWTH OF THE SUBPRIME MARKET Subprime lending nationwide has grown tremendously in the past decade. Between 1993 and 1998, subprime mortgage lending increased eight‐fold, from $20 billion to $160 billion nationally. In 1999, the subprime market share represented nearly 13 percent of all mortgage originations, up from less than five percent in 1994.22 By 2003, the industry accounted for about $330 billion.23 In Pennsylvania, it is estimated that 8.2 percent of all mortgages originated in 2003 were subprime, which is somewhat lower than the national average of 10 percent of all originations. The birth and growth of the subprime market can be attributed to three federal laws passed in the 1980s: • The Depository Institutions Deregulation and Monetary Control Act. 24 Enacted in 1980, it deregulated mortgage loan interest rates by preempting states’ interest rate ceilings on first lien mortgage loans. This allowed lenders to charge interest rates based not just upon the cost of money, but also to compensate for the higher risk of lending to subprime borrowers. • The Alternative Mortgage Transaction Parity Act.25 State laws that restrict a number of features on variable‐rate mortgage loans, crucial to subprime lending products were preempted. Specifically, the law allows non‐federally chartered “housing creditors” to originate loans with features such as variable interest rates, balloon payments, and negative amortization. Losing the American Dream:
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The Tax Reform Act of 1986. Although it ended the deductibility of interest paid on credit cards and auto loans, the Act permitted taxpayers to continue to deduct interest paid on mortgage loans secured by their residence or a second home. This change created an incentive for homeowners to take out home equity loans or refinance their existing first mortgages and use the proceeds to pay off non‐
deductible consumer debt.26 Lenders created new mortgage products based on these provisions and aggressively marketed the loans to people who wanted to pay off other debts and continue to deduct interest from their taxes. In fact, one result was that homeowners began to use equity loans for debt repayment more often than for home improvement. In 1988, 35 percent of home equity loans were used to repay other debt, compared to 45 percent used to pay for home improvements. By 1994, 68 percent of home equity loans were used to pay other debt, compared to 38 percent used to fund home improvements.27 SUBPRIME LENDERS The primary source of information on mortgage lending is data reported under the Home Mortgage Disclosure Act (HMDA) through which lenders report loan data to assist in determining if financial institutions are serving the housing needs of their communities; to help public officials in distributing public‐sector investments to attract private investments to areas where it is needed; and to assist in identifying possible discriminatory lending practices. In 2004, there were approximately 41.6 million loan records reported for calendar year 2003 from 8,121 specific banks, savings associations, credit unions, and other mortgage lending institutions.28 The process of identifying “subprime lenders” is less than perfect.29 HMDA data does not include information about interest rates, fees, loan terms, applicants’ credit histories, or credit scores, thus making it impossible to identify loans as subprime. Each year, the U.S. Department of Housing and Urban Development (HUD) uses a variety of sources to prepare a nationwide list of HMDA‐reporting institutions for which subprime loans make up a majority of their total lending. It’s important to note, however, that loans made by lenders designated as subprime are only an approximation of the number of subprime loans actually made; some of the loans made by these lenders are prime loans and some of the loans Losing the American Dream:
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made by prime lenders are subprime loans. There is no precise method for determining how many loans there are in either of these categories.30 The face and shape of the subprime lending community has also been changing. In the early 1990’s several lenders such as the Money Store and United Companies were known for originating primarily subprime loans. By the late 1990’s, those two companies and many others filed bankruptcy or ceased operations because their portfolios of subprime loans were in default and then sold to other larger lenders. Other subprime lenders were purchased by mainstream lenders that traditionally originated only prime loans in an effort to become a one‐stop shopping source for mortgage financing.31 The HUD list of subprime lenders has grown from 51 lenders in 1993 to 183 lenders in 2002, including well‐known names such as MBNA America, Key Bank USA, Chase Manhattan Bank USA, Citifinancial Services, Inc., Wells Fargo Financial, and EMC Mortgage Corporation.32 NEGATIVE EFFECTS OF SUBPRIME LENDING •
Higher Foreclosure Rates. Subprime lending is designed to extend credit to borrowers who do not meet standard underwriting criteria. It fills a necessary niche in today’s credit market, as long as it is provided responsibly and only to those unable to qualify for conventional loans.33 The higher costs must be reasonably related to the higher risk, and the borrower should be able to afford the mortgage payment. Numerous studies have found a high correlation between the increased number of subprime loans and higher foreclosure rates.34 Harvard’s Joint Center for Housing Studies recently said: More than 10 studies of foreclosure activity in individual metropolitan areas draw remarkably consistent conclusions. Even in periods of strong economic growth, there is a relatively high incidence of foreclosure among subprime loans in lower‐income and minority neighborhoods.35 According to Mortgage Bankers Association of America (MBAA) data, subprime loan foreclosures represented 11.9 percent of the foreclosures in Pennsylvania in 2003, compared to the prime market where only 0.85 percent of loans were in foreclosure. This is an astounding 1,400 percent difference. Losing the American Dream:
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Higher Incidence of Abusive Lending Practices. Several national and Pennsylvania‐specific studies have found that, while most subprime loans are not abusive, most abusive loans are subprime.36 There are several reasons for this. The subprime lending industry is less regulated and standardized than the prime market, providing greater opportunity for abuse. The vast majority of subprime loans are made by non‐depository mortgage companies. Further, mortgage brokers are involved in subprime lending and their system of compensation encourages some brokers to provide borrowers with costly loans or loan terms because they believe they can get away with it. While many borrowers believe that a mortgage broker has a legal duty to find them the best loan terms available, in reality, a broker has no fiduciary duty to the borrower. As Eric Stern, Senior Vice President at the Center of Responsible Lending said in testimony before a Joint Congressional Hearing on subprime lending, “[r]ather than looking out for the borrower’s best interest, the broker is generally looking out for his or her own bottom line.”37 •
Unequal Impact on Lower Income Borrowers, Minorities and the Elderly. A HUD study analyzed approximately one million mortgages reported under HMDA in 1998 and found that subprime lending has a disproportionate impact on low‐income and minority borrowers. −
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Subprime loans are three times more likely in low‐income neighborhoods than in high‐
income neighborhoods. In low‐income neighborhoods, subprime loans represented 26 percent of total loans made, compared to 11 percent in moderate income neighborhoods and seven percent in upper income neighborhoods. Subprime loans are five times more likely in African‐American neighborhoods than in white neighborhoods. In predominantly African‐American neighborhoods, subprime lending accounted for 51 percent of home loans made, compared to only nine percent in predominately white areas Homeowners in high‐income African‐American neighborhoods are six times as likely as homeowners in high‐income white neighborhoods to have subprime loans. Only six percent of homeowners in high‐income white neighborhoods held subprime loans, while 39 percent of homeowners in high‐income African‐American neighborhoods received subprime loans, which is more than twice the rate for homeowners in low‐income white neighborhoods, at 18 percent.38 Losing the American Dream:
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Elderly homeowners are targeted by some home equity lenders because they often have substantial equity and have limited fixed incomes that do not accommodate unexpected expenses, such as home repairs, increased taxes, medical expenses, and the like. In 2000, Freddie Mac noted that the American Association of Retired Persons (AARP) found that borrowers 65 years of age or older were three times more likely to hold subprime mortgages than borrowers under 35. As depicted on the following chart, the older one gets, the more likely it is that the mortgage they get will be subprime.39 Losing the American Dream:
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A BUS IV E L ENDING P RACTICES Growth of the subprime mortgage industry has enabled many people—who would otherwise have been unable—to own their own homes. While it is crucial that consumers have reasonable access to capital, such access must not be tainted by deceptive, unlawful, or other abusive lending practices. Certain aggressive, unscrupulous, and even fraudulent lending practices reportedly occur in the subprime market more often than in the prime market. This is especially true among some of the most vulnerable consumers –lower income, elderly, and minority borrowers.40 Stepped‐up enforcement by the Federal Trade Commission and the U.S. Department of Justice has heightened the nation’s awareness of the problem.41 Mortgage borrowers should be able to answer questions about the loans that they are considering. Questions such as: Whose idea was it to obtain this particular loan with these particular terms? Was the loan “sold” to them, either through direct phone or mail solicitation or even in person? Did they have a choice of loan terms, or was it presented as a “take it or leave it” proposal? What were the borrower’s circumstances at the time the loan was arranged? Was the borrower in dire straits—in need of emergency home or automobile repairs, experiencing high uncovered medical expenditures, behind in their unsecured credit card debt, or possibly even facing mortgage foreclosure? Are the terms of the financing understandable, and are they the best terms available? Is the loan able to be repaid? Often uninformed borrowers, desperate for mortgage financing, are “talked into” financing that is destined to fail, rather than carefully choosing a loan on reasonable terms that they can afford. Abusive lending practices usually involve some form of deception or fraud, the manipulation of borrowers through aggressive sales tactics, or the taking advantage of a borrower’s situation or their lack of understanding of the loan terms. As highlighted in recent reports,42 some of these practices include: • Making a Loan Without Regard to the Borrower’s Ability to Repay. Loans that are based solely on the homeowner’s equity (what the house is worth) even when it is obvious that the borrower will be unable to afford the payments is a particularly egregious practice found by HUD. In some cases, elderly people living on fixed incomes ended up having monthly payments that equaled or exceeded their monthly incomes. Such loans quickly lead borrowers into default and foreclosure.43 Losing the American Dream:
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•
Loan Flipping. Homeowners are encouraged to refinance their loan repeatedly over a relatively short period of time. With each refinancing the borrower is charged points, fees, and costs that sometimes include prepayment penalties. This causes the borrower’s debt to increase, eventually stripping equity from their home. Many times the loan is refinanced in an effort to bring the homeowner current on an existing loan that is in default. The new loan is even more unaffordable than the previous one. •
Excessive Fees and “Packing.” Subprime lending, because of the higher risk of loss, involves higher costs to lenders and results in higher costs to the borrower. Higher interest rates and higher points are typical in the subprime market. But the fees charged sometimes far exceed what would be expected or justified based upon economic reasons or the credit worthiness of the borrower.44 Prior to the passage of the Federal Homeownership Equity Protection Act (HOEPA) in 1994, interest rates as high as 17 or 18 percent were not uncommon with respect to some borrowers in the subprime market.45 Another abuse is the practice of “packing” extras into the amount of the loan, such as the cost of credit life and/or disability insurance premiums, especially “single premium insurance,” which is payable in a lump sum at inception of the loan, rather than over time with each monthly payment. •
Aggressive and Deceptive Marketing.46 Some subprime lenders target certain borrowers and then use a combination of mail, phone solicitation, and even personal home visits to get them to take out a loan. Most of these solicitations are legal and do not constitute overreaching—but some do. Minority, low‐income, or elderly homeowners or people who are delinquent on their existing mortgages and in threat of foreclosure are particularly vulnerable to these tactics. Some borrowers are told the combined principal and interest payment of the loan, but they may not be told (and do not know to ask) how much will be required to fund taxes, insurance, or primary mortgage insurance premiums. Or, for example, tax estimates provided bear no relationship to reality. In some cases, borrowers purchasing a new home are told only about taxes for the lot, not the cost of the taxes on a new home built on the lot. Some subprime lenders do not escrow for taxes and insurance. Some loan solicitors know borrowers will have problems with the loans and are ready and willing to refinance the mortgage to include the unpaid taxes with, of course, additional fees. Losing the American Dream:
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Home Improvement Scams. Unscrupulous home improvement contractors, working with mortgage brokers or as their agents, sometimes target homeowners for loans to finance home repairs that are not needed or overpriced. The loan is frequently a subprime mortgage with high rates and fees and often solicited in the borrower’s residence through the use of deception or coercion. The terms of the loan and price of the work change after work has progressed. In some cases the contractor receives loan proceeds directly from the lender and the work is never started, or it is started but not completed.47 Homeowners targeted for abuse by home improvement contractors often start out with no mortgage at all or a market rate first mortgage that they can afford, but are encouraged to refinance to include the cost of the repairs. The new loan ends up being a high cost loan that is not affordable. •
Prepayment Penalties. This is a penalty that comes due when a borrower pays off their loan early, typically upon refinancing the loan or upon the sale of the home. The penalty will usually exist during the first five years or so of the loan term and can involve as much as six to 12 months interest on the loan. A $100,000 loan at 11 percent interest, with a six‐month‐interest prepayment penalty, could have a penalty over $5,000. A homeowner could try to refinance his mortgage (perhaps to obtain a better interest rate or to borrow additional funds) only to find he needs a large sum of money to complete the refinancing. This sum would typically have to be refinanced into the new loan or be paid out of the homeowner’s equity. Many borrowers are unaware that their loans contain prepayment penalties. Some loan originators fail to point it out or only do so at the closing table. Others mislead borrowers into thinking that there is no prepayment penalty by simply telling them that they can refinance later at a lower rate.48 Unfortunately, prepayment penalties are common in the subprime market. While less than 2 percent of borrowers in the conventional or prime market contain prepayment penalties, nearly two‐thirds of the subprime loans made in the period 2000‐2002 contained such provisions.49 The Federal Office of Thrift Supervision, in September of 2002, breathed new life into state laws that provide consumer protections against prepayment penalties and late charges by amending its regulations,50 which previously pre‐empted such state laws. 51 Pennsylvania has enacted legislation prohibiting prepayment penalties.52 Losing the American Dream:
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Balloon Payments. A balloon payment mortgage requires the borrower to repay the mortgage in full at some time sooner than the full term of the mortgage. For example, a mortgage that is amortized over 30 years (360 monthly payments of principal and interest) could have to be repaid in full after just five years. Approximately ten percent of subprime loans have balloon payment requirements.53 A balloon payment mortgage may make sense for some borrowers—a borrower who expects to move and sell the residence prior to the loan “ballooning;” or one who expects to be able to obtain refinancing at the same or a better rate within the balloon term. But for fixed‐income borrowers faced with increasing interest rates or borrowers with poor credit unable to repair it within the balloon term, this product can lead to an inability to obtain refinancing at an affordable rate when the balloon comes due, resulting in a loss of the home. •
Negative Amortization. In a negatively amortized loan, the borrower’s monthly mortgage payment does not cover all of the interest due, much less any principal. Each month the outstanding loan balance increases rather than decreases. Negatively amortized loans usually have a low monthly payment for several years that will increase with the passage of time. They can be used to help people on limited incomes qualify for a mortgage, but if their income does not increase with the increasing loan payments, it will be unaffordable. Losing the American Dream:
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A D R A M AT IC I NCREAS E IN P ENNSYLVANIA F OR EC LOSUR ES There were many signals to indicate expanding financial trouble for homeowners in Pennsylvania over the past few years. Sheriff’s offices around the Commonwealth indicated that they were overwhelmed by the volume of foreclosures. The number of applications to HEMAP was increasing. Bankruptcy rates were rising. More owners were paying more than 30 percent of their income for housing costs than ever before. But obtaining complete, accurate, and reliable data for a statewide study of foreclosures in Pennsylvania was extremely difficult. Record keeping across Pennsylvania’s 67 counties is widely divergent and, while statistics are kept on the number of foreclosure actions filed in the counties, most do not differentiate between residential and commercial properties. Nor do they distinguish between owner‐occupied and rental properties. Further, the fact that a foreclosure action is filed does not always mean that the owner eventually lost the property. Many owners threatened with foreclosure bring the account current prior to a sheriff sale, work out a forbearance agreement with the lender, or file bankruptcy in an effort to save their homes. In an effort to more fully understand the issue, the Pennsylvania Department of Banking retained The Reinvestment Fund (TRF), a Philadelphia‐based nonprofit development finance corporation. TRF assembled as much data as possible and was able to make certain assumptions on a statewide basis. The TRF study, Mortgage Foreclosure Filings in Pennsylvania, can be found at TRF’s website, http://www.trfund.com. KEY TRF FINDINGS • In 2003, Pennsylvania had the 9th highest foreclosure rate among prime loans, at 0.85 percent. The four highest foreclosure rates were Utah at 1.43 percent, Ohio at 1.34 percent, South Carolina at 1.32 percent, and Indiana at 1.23 percent. Slightly ahead of Pennsylvania was Mississippi at 0.89 percent and following Pennsylvania was Idaho at 0.84 percent. • In the same year, Pennsylvania had the 4th highest foreclosure rate for subprime loans, at 11.94 percent. The three highest subprime foreclosure rates were Ohio at 15.15 percent, Indiana at 13.90 percent and Kentucky at 12.43 percent. Following Pennsylvania were Mississippi at 11.58 percent, South Carolina at 11.44 percent and Michigan at 11.43 percent. Losing the American Dream:
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•
Statewide, Pennsylvania experienced an estimated 14 percent increase in sheriff sales in the last three years. An estimated 55,163 homes have been sold at sheriff sales across the Commonwealth during this period. During the same three‐year period, 26,652 households filed an application for HEMAP and 7,038 were approved. In 2002 and 2003, HEMAP experienced a record‐breaking application volume of over 8,900 applications each year, compared to 1996 and 1997, when application volume averaged approximately 5,900 per year. •
Consumer bankruptcy filings in Pennsylvania have increased over 200 percent between 1990 and 2001. CAUSAL FACTORS While there clearly has been some amplification of the traditional factors that affect foreclosures, they do not explain why Pennsylvania’s rate has grown so significantly and is so much higher than other states. The growth of the subprime mortgage market and the higher risk of default and foreclosure associated with subprime loans is the primary reason for the increase in loan defaults and foreclosures in Pennsylvania. • Traditional Factors. In 2003, 11.9 percent of subprime loans originated in Pennsylvania were in foreclosure. This rate is at least three percentage points higher than can be explained by the traditional factors causing foreclosure. Pennsylvania‐
specific consideration of several of the traditional factors which affect foreclosure rates include: − Loan‐to‐value ratios are increasing in Pennsylvania—76.9 percent in 2003, compared to the national average of 73.5 percent. Yet more than half of the states in the nation had higher loan‐to value ratios. A higher loan‐to‐value ratio increases the likelihood that a property will go to foreclosure. − Home prices are appreciating at a slower rate than the nation. In 2000, the median home value in the nation was $119,600 and represented an 18 percent increase since 1990 (after adjusting for inflation). In Pennsylvania, the median home value was $97,000 in 2000, just a 5.2 percent increase since 1990. Slowly appreciating real estate markets tend to have higher foreclosure rates. − Pennsylvania has one of the highest homeownership rates in the nation. In 2000, 71.3 percent of all households owned their own homes versus 68 percent nationwide. − Unemployment in Pennsylvania is lower than the national rate and is increasing at a slower rate than most other states. In 2003, it was 5.6 percent, compared to the national rate of six percent. However, unemployment is still cited by 50‐60 percent of the HEMAP applicants as the reason for their financial distress. Losing the American Dream:
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•
Subprime Mortgage Market. A disproportionate number of subprime loans made in Pennsylvania went into foreclosure. −
60‐75 percent of all sampled loans in foreclosure were originated by subprime lenders. −
In 2002, 9.9 percent of all loans originated in Pennsylvania were made by subprime lenders. −
Subprime borrowers present a significantly greater risk of default and foreclosure than prime borrowers and consequently, subprime borrowers pay a higher price to borrow money. −
Every Pennsylvania county studied had a significantly higher percentage of subprime loans in foreclosure than prime originations. −
Berks, Allegheny, Lehigh, and Bucks counties had the highest shares of subprime foreclosures, each with more than 70 percent. −
Monroe, Philadelphia, and Allegheny Counties had the highest rates of subprime originations. −
Foreclosures in Pennsylvania are typically concentrated in areas with lower than average housing values, lower than average family incomes, and higher than average number of minority households. −
There is a lack of financial education among borrowers ranging from understanding the economics of interest rates to the importance of paying bills on time. −
There is a lack of information among borrowers and communities about alternatives to high‐cost subprime loans. −
Increased consumer access to subprime mortgage products, which allows for lower down payments, lower savings balances, higher loan‐to‐value ratios, and lower credit scores, may make long‐term homeownership unsustainable. •
Additional Factors. TRF reported several additional national and Pennsylvania factors as likely causes of Pennsylvania’s foreclosure rate being at least three percentage points higher than traditional factors explain. −
National Factors. Including the securitization of the residential mortgage market, a lack of financial education among borrowers, and a lack of information regarding alternatives to high‐cost loans. Losing the American Dream:
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Pennsylvania Factors. Including the fact that regulations in Pennsylvania are not protecting homeowners as intended, abusive lending practices are growing, the cost of home ownership is rising, and the fact that consumer expenditures on health care costs have grown faster than incomes. And, among the Pennsylvania factors, TRF documents specific abuses committed by brokers, contractors, builders and/or developers, appraisers, lenders and loan servicers that increase the likelihood of foreclosure for Pennsylvania consumers. A sampling of the abusive practices documented by TRF are listed below: Lenders: o Refinancing low (or no) interest rate loans into higher rate loans; o Misrepresenting critical loan terms (i.e. interest rate, fees, prepayment penalties); o Failing to provide appropriate ECOA notices when the loan for which an applicant actually applied is not the loan that they received. Brokers: o Charging ane collecting fees for services not performed; o Including balloon mortgages when the borrower’s prospects for being able to pay (or comprehend) the balloon are minimal; o Falsifying bank statements, W‐2 forms, and employment verifications; o Misrepresenting fake gifts as down payments; o Representing a borrower’s mortgage payment as less than it actually was; o Selling mortgage products that are inappropriate (or unsuitable) given the minimal borrower’s unique circumstance in order to get the borrower “qualified.” Servicers: o Posting payments made on‐time as though they were late to the borrower’s account; o Failing to respond to qualified written requests for an accounting on a loan; o Force‐placing property insurance on properties that have existing policies; o Charging fees not permitted (or justified); o Failing to engage in proper loss mitigation strategies (which are likely dictated by the investor or in the case of Federal Housing Administration loans, HUD). Contractors: o Builders/home improvement contractors acting as (unlicensed) mortgage brokers; o Charging for work that was never performed. Losing the American Dream:
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Builders/Developers: o Falsely inflating the value of a property in order to give the appearance later that concessions were made on the price of a home. Appraisers: o Yielding to pressure from brokers/lenders/consumers to produce inflated appraisal values in an effort to support larger loans; o Voluntarily cooperating with builders/developers to estimate market‐
inflated values in an effort to support higher sale prices. Losing the American Dream:
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E FFO RTS TO C U R B A BUS IV E L ENDING P RACTICES FEDERAL RESPONSE • Home Ownership Equity Protection Act. On the federal level, the first and most significant effort to address abusive lending practices was the 1994 enactment of the Home Ownership Equity Protection Act (HOEPA),54 which created protections for consumers who enter into so‐called “high cost” loans with interest rates or fees that exceed specified triggers. HOEPA is defined in Section 226.32 of Reg Z, to: − Include both home equity and refinance loans on a person’s primary residence, but not home purchase/construction mortgages or home equity lines of credit (HELOC) loans. − Trigger if the loan has either: o An Annual Percentage Rate (APR) of 8 percent (first lien loans) or 10 percent (junior lien loans) greater than a U.S. Treasury security which has a comparable maturity as of the 15th of the month prior to the month the loan application is received;55 or o The total of all points and fees payable at or prior to loan closing exceeds the greater of $510 or 8 percent of the total loan amount.56 − Include “total points and fees” such as: points, loan fees, origination fees, credit life/disability premiums, yield spread premiums, service released premiums, mortgage broker compensation, document preparation fees, and appraisal or title insurance costs (if performed by an affiliate of the lender). − Require a special disclosure to the borrower at least three days prior to closing stating: the APR, amount of borrower’s monthly payment, and the amount of any balloon payment. Variable‐rate transactions must include a statement that the interest rate and payment may increase and provide the maximum payment that could be reached. Refinancings must state the total amount borrowed and disclose any premiums or other charges for optional credit insurance. − Limit prepayment penalties to the first five years of a HOEPA loan. They are only payable if the HOEPA loan is paid off with funds from another lender unaffiliated with the original HOEPA lender and if the borrower’s debts do not exceed 50 percent of their gross monthly income. − Prohibit balloon payments that come due within the first five years of the loan, and prohibit negative amortization, where monthly mortgage payments are not sufficient to cover the principal and interest. Losing the American Dream:
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−
Prohibits lenders from engaging in a “pattern and practice” of extending loans that the lender knew the borrower could not afford based upon the borrower’s income. •
U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). The DOJ and FTC announced in January 1998 that they were stepping up enforcement efforts and pursuing investigations of “alleged abuses in the booming businesses of home‐equity and subprime mortgage lending.” This included investigations already in progress by the Civil Rights Division of the Justice Department involving borrowers being targeted for subprime loans because of their race or age, involving the underwriting, marketing and pricing of loans.57 •
Interagency Guidance. On March 1, 1999, the Federal Deposit Insurance Corporation, the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) issued an Interagency Guidance on Subprime Lending (1999 Guidance).58 The guidelines outlined to banks and thrifts the inherent risks associated with subprime lending and some safeguards and controls that lenders are expected to have in place before engaging in subprime lending. The guidelines provide that: Institutions that originate or purchase subprime loans must take special care to avoid violating fair lending and consumer protection laws and regulations. Higher fees and interest rates combined with compensation incentives can foster predatory pricing or discriminatory “steering” of borrowers to subprime products for reasons other than the borrower’s underlying creditworthiness. An adequate compliance management program must identify, monitor and control the consumer protection hazards associated with subprime lending. 59 On January 31, 2001, the same agencies jointly issued an expanded Guidance (2001 Guidance),60 more specifically defining a subprime loan, and expanding on the potential for predatory or abusive lending practices in the subprime market.61 As stated by the 2001 Guidance, subprime lending practices are designed to responsibly serve customers with special credit needs, but some forms of subprime lending may be abusive or predatory: Some such lending practices appear to have been designed to transfer wealth from the borrower to the lender/loan originator without commensurate exchange of value. This is sometimes accomplished when the lender structures a loan to a borrower who has little or no ability to repay the loan from sources other than the collateral pledged. When the default occurs, the lender forecloses or otherwise takes possession of the Losing the American Dream:
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borrower’s property (generally the borrower’s home or automobile). In other cases, the lender may use the threat of foreclosure/repossession to induce duress upon the borrower for payment. Typically, predatory lending involves at least one, and perhaps all three, of the following elements: − Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation; − Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); or − Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower. Loans to borrowers who do not demonstrate the capacity to repay the loan, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound. Such lending practices should be criticized in the Report of Examination as imprudent. Further, examiners should refer any loans with the aforementioned characteristics to their Agency’s respective consumer compliance/fair lending specialists for additional review.62 COMMONWEALTH RESPONSE •
Act 55. The Pennsylvania General Assembly approved Act 55 of 2001,63 which was signed into law on June 25, 2001, and was designed to address the problem of predatory lending, applies only to non‐purchase residential mortgages of less than $100,000 and which meet the rate and points criteria set forth in the federal HOEPA (i.e., “covered loans”). Balloon payments are permitted if the loan becomes due and payable ten or more years from the date of the loan or if it is a residential bridge loan. Act 55 also limits negative amortization, default interest rates, advance payments, and prepayment fees during the first five years of the loan. If a prepayment penalty is provided the lender must also make available loans that do not have prepayment penalties. The borrower who obtains a “covered loan” must be warned as to the potential consequences of obtaining the loan and advised to seek counseling. Like HOEPA, Act 55 prohibits lenders from engaging in a “pattern or practice” of making covered loans without regard to the consumer’s ability to repay the loan. Points cannot be charged where a covered loan is used to refinance an existing Losing the American Dream:
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covered loan. It limits refinancing low interest rate loans with covered loans and places limitations on the financing of single premium credit insurance. The law also contains provisions regarding reporting covered loans to credit bureaus, verification of mortgage broker licenses, making covered loan proceeds available directly to home improvement contractors, and places enforcement responsibility with the Department of Banking.64 Act 55 also expressly preempted local ordinances from regulating lending practices.65 It has been brought to the Department of Banking’s attention by consumer advocacy groups and the TRF Study that Act 55 is not effective in its original goal of preventing predatory lending abuses. The Department already recognizes that the coverage of Act 55 is severely limited by the current monetary cap and its non‐
applicability to purchase money mortgages. In order to foster a complete discussion on Act 55, the Department, as part of its recommendations, will lead a further dialogue by convening meetings with industry and consumer groups and the General Assembly regarding the overall effectiveness of Act 55’s current consumer protection provisions. •
Creation of the Commonwealth’s Office of Financial Education and the Governor’s Task Force for Working Families. Executive Order 2004‐07 created each of these endeavors which are both located within the Department of Banking. One of the goals of the Task Force was to improve financial education in Pennsylvania’s schools, communities and workplaces. The Office of Financial Education will strive to meet the recommendations of the Task Force. •
Monroe County Foreclosure Study and Remediation Plan. In the fall of 2003, a state task force was appointed by Governor Edward G. Rendell, chaired by the Secretary of Banking, to investigate certain abusive and unfair lending practices that had allegedly been occurring in connection with home sales and mortgage financing in Monroe County, Pennsylvania. A Homeowner’s Helpline was created (See Appendix D of this Report for additional information). •
Funding for the Homeowner’s Emergency Mortgage Assistance Program. As indicated in Appendix B of this Report, FY 2004‐05 was the first time since FY 1997‐
98 that the Governor proposed and the General Assembly approved a line‐item appropriation for the HEMAP program. The amount appropriated was $5 million. Without that funding, HEMAP would not have been able to meet the increased demand being placed on the program. Losing the American Dream:
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•
PHFA’s Revamped and Refocused Counseling Efforts. Historically, homeowners have received some assistance and advice from counseling agencies once they are already in default on their mortgage and are in the process of applying for HEMAP assistance. For a number of years, PHFA also required and paid for pre‐settlement counseling for homebuyers in the Agency’s single family First‐Time Homebuyer Program, who were receiving special financial aid in the form of Closing Cost or Down Payment Assistance or reduced interest rates. Within the past year, PHFA has revamped its counseling program. Under the new program PHFA is sponsoring: −
−
•
Pre‐purchase counseling and homebuyer workshops designed to provide information to homebuyers before they sign the agreement of sale and begin to arrange financing. Training for all of the counseling agencies in its network concerning the various aspects of abusive lending practices. It is the goal of the Agency to provide this training to all 70 counseling agencies with which it partners across the Commonwealth. Fundamental Reorganization of the Department of Banking. No matter how many new rules or programs are implemented to protect consumers, they will be ineffective without an infrastructure that will enable the Department to enforce them. That is why the Department is in the process of reorganizing itself to dramatically enhance its enforcement capabilities. First, the Department has streamlined its structure to increase efficiency. Rather than being divided into separate bureaus, both depository and non‐depository examiners now fall under the Bureau of Examinations. Similarly, personnel in the Department’s Compliance Division, which is responsible for enforcing laws and regulations applicable to non‐depository entities, was merged into the Bureau of Supervision and Enforcement which formerly only handled enforcement matters for depository institutions. All of these efforts have resulted in better enforcement through effective communication and increased efficiency. Second, the Department is enhancing its licensing process by increasing the scrutiny it applies to license applicants. In the very near future, in accordance with applicable statutory authority, the Department will review new information on applicants to make judgments about the character, reputation, and fitness of an applicant including a review of résumés, references, credit reports, industry databases that report wrong‐doing, and many other sources. To do this, the Department will add two management technicians to conduct initial screenings of applications and two investigators to conduct in‐depth investigations on applications of concern. This increase in personnel will take the licensing division from nine personnel to 13. Losing the American Dream:
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Third, the staff of the Consumer Services Division was recently increased from three to seven personnel. This increase will allow the Department to promote awareness about the services it offers and to provide additional resources to consumers such as referring consumers directly to appropriate consumer credit counseling agencies, mediating complaints between consumers and businesses when appropriate, and providing links on the Department’s website as helpful resources for consumers. In concert with this effort, the Department has added a new Consumer Group Relations Coordinator position to the Bureau of Licensing, Investigation, and Consumer Services. The purpose of this position is to keep in close contact with consumer advocates so that consumer issues are detected early and acted upon quickly. Fourth, the Bureau of Examinations is adding 11 new examiners to its non‐depository program that is currently staffed by 12 examiners. This nearly 100 percent increase in non‐depository examiners will robustly enhance the Department’s examination of non‐depository entities like mortgage bankers and brokers, check cashers, installment sellers, sales finance companies, and money transmitters. In addition, the Department will strengthen its examination process and make examinations more substantive and meaningful. Fifth, the Department is creating a new Investigation Division that will conduct in‐
depth investigations on people or entities under the Department’s jurisdiction when there are concerns about consumers being harmed or the safety and soundness of a depository institution. This division will consist of 11 new positions: the Chief of the Division who must have law enforcement experience in financial crimes, three senior examiners, two mid‐level examiners, two investigators, an intelligence analyst, a computer technician, and a data analyst. The Investigation Division will have new offices in both the Philadelphia and Pittsburgh areas that will each house a three‐
person team consisting of a senior examiner as the leader, a mid‐level examiner, and an investigator. The intelligence analyst will be responsible for creating an intelligence program using sophisticated data‐gathering software that is currently in use by federal government agencies with military and intelligence functions. The Division will also be equipped with a mobile office that will facilitate seizing and copying records that are needed for an investigation. The computer technician will be trained to seize evidence from computers and computer networks. All of the new personnel will receive state‐of‐the‐art training from such sources as the Computer and Financial Investigations Division of the Federal Law Enforcement Training Center and the National White Collar Crime Center. The Department expects Investigation Division personnel to work closely with federal, state, and local law enforcement agencies so that the Department’s administrative enforcement will be complemented in appropriate cases by vigorous criminal prosecution. As the Department implements these new initiatives, it will continue to innovate within its authority in order to protect consumers. Losing the American Dream:
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LOCAL RESPONSE Several communities across the Commonwealth have been fighting to protect their residents from the devastating effects of foreclosures. Urban, rural, and suburban communities have organized to address abusive lending practices and excessive mortgage foreclosures. Most are ad hoc responses with little, if any, coordination between them. Funding usually comes from a variety of public and private sources and is likely to be given on a one‐time basis. Local responses range from consumer advocacy coalitions and task forces to law enforcement initiatives to identify and prosecute unscrupulous lenders. Consumer advocacy groups often take on the issue of predatory lending as one of their many charges and struggle to offer help to homeowners. Work includes, but is certainly not limited to, the effort to educate citizens about ways to identify and protect themselves against abusive lending practices. (See Appendix D.) In addition, several newspaper series about the foreclosure issue have appeared in Pennsylvania: • In April 2001, the Pocono Record highlighted the foreclosure problems and suspected predatory lending in Monroe County with a three‐day series of articles by Matt Birkbeck entitled “A Price Too High.” The series looked at the practices used by some local builders to lure homebuyers to the Poconos, many of whom purchased homes with over‐inflated appraisals and suspect lending practices. The newspaper continued to follow the problems, with stories appearing almost weekly by Birkbeck and then by reporter David Pierce, about the many issues surrounding the increased rate of foreclosures in the Poconos. • A two‐part New York Times series, ʺA Home Too Far,” was published on the front page of the April 11 and 12, 2004 editions, detailing the home‐buying boom and subsequent skyrocketing foreclosure rates in the Poconos. • The Pittsburgh Post‐Gazette published a special report, “A Dream Foreclosed,” in June 2004, a four‐part series detailing the foreclosure crisis in Allegheny County. • In July 2004, the Associated Press published a four‐day series on foreclosures called “Lost Homes, Lost Dreams.” The series detailed the downside of homeownership expansion across Pennsylvania and looked in detail at the high rates of foreclosures in Monroe, Allegheny and Philadelphia counties, and noted an absence of state action and regulation of abusive lending practices. • The Allentown Morning Call published four stories in September and October 2004 about the work of a local group, the Community Action Committee of the Lehigh Valley, to encourage the U.S. Attorney’s office to investigate and eventually file federal fraud charges in alleged predatory lending practices in the Lehigh Valley. Losing the American Dream:
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R ECOMMENDAT IONS FOR P ENN S Y LVAN IA A CTION LEGISLATIVE PROPOSALS − Loan Interest and Protection Law (“Act 6”) − Raise the Monetary Cap that Restricts the Coverage of Act 6. The Department of Banking believes that the current Act 6 monetary cap of $50,000, which was set in 1974, no longer provides Pennsylvania consumers with effective protections for their residential mortgage loans. According to the TRF Study, only 17.8 percent of homes were valued at $50,000 or less in 2000. It is safe to say that this percentage has continued to fall in the last five years. The Department believes tying the Act 6 monetary cap to the Federal Housing Administration’s (FHA) annual mortgage insurance limits, with a maximum amount limited to the amount applicable in Philadelphia, will potentially provide most consumers with the protections afforded by Act 6. Based upon the current FHA limits, the cap would range from $172,632 to $237,500 for a one‐family home loan, depending on location. − Provide the Department of Banking with Enforcement Authority Under Act 6. Currently, under Act 6, the Department is authorized to promulgate regulations, which can clarify the meaning of Act 6’s provisions, but cannot fine or issue any orders to enforce the law or any such regulations. The only penalties under Act 6 are criminal in nature, which, for the Department, must be pursued by the Office of the Attorney General (OAG) pursuant to the Commonwealth Attorneys Act (CAA). This is likely due to the fact that when Act 6 was enacted in 1974, attorneys from OAG staffed the Department, and therefore, Department attorneys could undertake criminal prosecutions, since they were technically OAG personnel. This changed in 1980 with the CAA, which established the elected Attorney General and provided for the separate Office of General Counsel to advise the Governor and each agency with attorneys assigned to each agency, but kept criminal enforcement for the Commonwealth housed within the OAG. Thus, following the enactment of the CAA, the Department lost its enforcement ability under Act 6 since the enforcement provisions of Act 6 are criminal in nature. Thus far, no amendments have been made to Act 6 that would replace this lost enforcement authority by providing the Department with civil money penalty and order authority, as has been done with other acts under the Department’s jurisdiction such as the Motor Vehicle Sales Finance Act. This oversight should be corrected by providing the Department with fining and order authority to match the regulation authority already granted to the Department under Act 6, so that the agency clarifying Act 6’s provisions is also the agency enforcing Act 6. Losing the American Dream:
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•
Mortgage Bankers and Brokers and Consumer Equity Protection Act (MBBCEPA) −
Licensing Individual Mortgage Loan Solicitors under Chapter 3 of MBBCEPA. Currently, employees of mortgage bankers, mortgage brokers and loan correspondents are exempt from individual licensure under Section 303(b)(11) of the MBBCEPA. The Department of Banking believes that each individual that solicits, provides, or accepts mortgage loan applications or assists borrowers in completing mortgage applications should be required to obtain an individual license, in addition to the current requirement for entity licensure. This would create more responsibility on the part of each individual mortgage solicitor, which should enhance the quality of brokering activity in Pennsylvania as well as the Department’s ability to regulate the mortgage brokering industry. −
Eliminate the “Builder” and “Real Estate” Licensing Exceptions and Amend the “Employee” Exception in the MBBCEPA. These licensing exceptions, appearing at Sections 303(b)(3) and (6) of the MBBCEPA, respectively, permit real estate brokers and builders, to the extent builders obtain mortgages for their own constructions or the sale of their own constructions, to engage in mortgage lending and brokering activities without a license. As part of the Department of Banking’s experience with the foreclosure problem in Monroe County, it is apparent that the lack of regulation of these entities engaging in the mortgage loan business hampered the Department’s ability to enforce the laws of the Commonwealth against these entities and aid consumers that were allegedly harmed by the conduct of these entities. Requiring these entities to obtain a license will place more responsibility upon these entities to abide by applicable mortgage lending and brokering laws and will enhance the Department’s ability to take action against unscrupulous realtors and builders in order to protect consumers. Concurrently with individual mortgage solicitor licensing, the Department believes that the “employee” exception from licensing in Section 303(b)(11) of the MBBCEPA should be amended to account for individual loan solicitor licensing. −
Create a Pre‐licensing Testing/Certification Requirement for Mortgage Brokers, Limited Mortgage Brokers and Individual Loan Solicitors under the MBBCEPA. Currently, licensees under the MBBCEPA are subject to a continuing education requirement; however, there is no requirement for any testing or certification prior to obtaining a license under the MBBCEPA. The Department of Banking believes that a pre‐licensing testing/certification requirement would help to reduce abuses in the industry by ensuring that licensees have a basic understanding of the rules surrounding mortgage originations prior to their engaging in the mortgage loan business. Losing the American Dream:
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•
Secondary Mortgage Loan Act (SMLA) −
Amend the SMLA Provisions Regarding Licensing and Enforcement to Mirror Similar Provisions in the MBBCEPA. The SMLA governs the origination and brokering of secondary mortgage loans, including home equity loans that involve a second lien on a residence. Thus, lenders and brokers that are “full service” will have licenses under both the MBBCEPA and SMLA in order to provide customers with the widest array of mortgage products. The problem is that the licensing and enforcement provisions of the SMLA are markedly different than those under the MBBCEPA. For example, in certain cases a company will only be required to register under the MBBCEPA as a “partially‐exempt entity,” but will have to obtain a full license under the SMLA. In other cases, the Department of Banking is able to take enforcement action against a company’s MBBCEPA license, but because there are not similar enforcement provisions in the SMLA, the Department is unable to proceed against the SMLA license. Based on these issues, the Department recommends that the licensing provisions and exceptions and enforcement authority under the SMLA be amended to mirror the similar provisions in the MBBCEPA. This will aid the Department’s ability to protect consumers harmed by secondary mortgage licensees through enforcement of the SMLA and will provide uniformity between the two acts that will benefit the industry. −
License Individual Mortgage Loan Solicitors under the SMLA. Similar to the Department of Banking’s recommendation regarding the MBBCEPA, the Department believes that each individual that solicits, provides, or accepts secondary mortgage loan applications or assists borrowers in completing secondary mortgage loan applications should be required to obtain an individual license under the SMLA, in addition to the current requirement for entity licensure. This would create more responsibility on the part of each individual mortgage solicitor, which should enhance the quality of brokering activity in Pennsylvania as well as the Department’s ability to regulate the mortgage brokering industry. −
Create a Pre‐licensing Testing/Certification Requirement for Secondary Mortgage Loan Brokers, Broker’s Agents and Individual Loan Solicitors under the SMLA. Again, similar to the Department of Banking’s recommendation regarding the MBBCEPA, the Department believes that a pre‐licensing testing/certification requirement would help to reduce abuses in the industry by ensuring that licensees have a basic understanding of the rules surrounding secondary mortgage loan originations prior to their engaging in the secondary mortgage loan business. In addition to the pre‐licensing testing/certification, the Department believes that SMLA licensees should be subject to the same continuing education requirements as licensees under the MBBCEPA, which Losing the American Dream:
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would be accomplished by amending the licensing provisions and exceptions and enforcement authority under the SMLA to mirror the similar provisions in the MBBCEPA. •
Department of Banking Code −
Amend Section 302.A(5) of the Department of Banking Code to Allow the Department to Share Licensee Consumer Complaint Information with the Public. Currently, Section 302.A(5) of the Department of Banking Code only permits the Department to share with the public information related to whether a license is current, suspended, or revoked pursuant to a final order issued by the Department. The Department believes that it would be of great benefit to consumers to be able to inquire as to whether a particular licensee that a consumer may be contemplating doing business with has been the subject of extensive consumer complaints or an enforcement proceeding. This would not only provide a further incentive for licensees to follow all applicable laws, regulations, and policies regarding the conduct of the mortgage business, but would also encourage licensees to provide effective consumer services. •
Homeowners Emergency Mortgage Assistance Act (“Act 91”) Suggested by PHFA for inclusion. −
Require Lenders to Submit Copies of Act 91 Notices to PHFA for the Purpose of Creating a Database for Collection and Analysis of Act 91 Foreclosure Notices. The Department considers the ability to locate foreclosure “hotspots” (areas where foreclosures suddenly spike above the accepted norm) an important part of foreclosure prevention. In order to locate these hotspots in a timely manner, the Department of Banking and the PHFA propose that lenders be required to submit copies of all Act 91 notices to PHFA so that PHFA may create a central database for the collection and analysis of issued Act 91 notices. By creating and analyzing such a database, the Department anticipates that early discovery of sudden spikes in foreclosures will enable state agencies to promptly investigate the causes and take steps to assist affected homeowners. −
Extend Temporary Stay to Include PHFA’s Internal Administrative Appeal. In Sections 402‐C(b) and 403‐C(b)(6) changes are recommended to extend the temporary stay imposed by Act 91 when a person applies for HEMAP assistance to include any administrative appeal that may be filed. Under Act 91, if a timely application is filed the lender must not proceed with foreclosure until PHFA renders its decision. If an application is denied, the applicant has 15 days to request an appeal. PHFA has a staff of three hearing examiners who hear appeals. Hearings are generally conducted by phone (although the applicant has a right to Losing the American Dream:
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an in‐person appeal) and are usually scheduled within 30 days from the date of the request. Decisions are usually rendered within 30 to 60 days of the hearing. −
Create Revised Act 91 Notice—Predatory Lending. In Section 403‐C(b)(1) changes are recommended to require lenders to include more information in the Act 91 Notice which will help to better identify predatory lending situations. The law would also be changed to allow PHFA to update the list of Consumer Credit Counseling Agencies on its website and include the website address in the notice. −
Require Prompt Reinstatement Figures from Lenders. In Section 405‐C a new Subsection (a.1) is recommended to require lenders to provide reinstatement figures to PHFA within 30 days of PHFA’s request or forfeit late fees, attorney fees, costs, and expenses. PHFA has been finding it extremely difficult to obtain reinstatement figures from some lenders, which further prolongs the process to the detriment of the consumer. −
Limit on Attorney Fees Reimbursable Under HEMAP. In Section 405‐C a new subsection (a.2) is recommended to limit attorney fees reimbursable by PHFA to no more than those allowed by Fannie Mae in connection with its lenders in Pennsylvania. −
Reduce Interest Rate on HEMAP loans. In Section 406‐C (5) the nine percent interest rate set by the law for repayment of the HEMAP loan should be removed. Instead, PHFA would establish the interest rate, which could not exceed the monthly rate for residential mortgages set by the Department pursuant to Act 6, which rate is currently set at seven percent. •
Appraisers Suggested by the Department of State for inclusion. −
Include the Department of Banking and the Office of Attorney General on the State Board of Certified Real Estate Appraisers (Appraiser Board). −
Increase the Appraiser Board’s maximum civil penalty of $1,000 for each violation to $10,000 for each violation. −
Authorize the Appraiser Board to take disciplinary action against certified real estate appraisers who have their right to practice before any state or federal agency suspended or revoked. Losing the American Dream:
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−
Authorize the Appraiser Board to take disciplinary action against certified real estate appraisers who have been found by a civil court of competent jurisdiction to have performed a fraudulent appraisal. ADMINISTRATIVE PROPOSALS • Issue Statements of Policy and Regulations to Define Dishonest, Fraudulent, Unfair/Unethical and Illegal Practices and Conduct under Section 313(a)(5) of the MBBCEPA and Specify the Proper Conduct of Business under Section 16(1) of the Secondary Mortgage Loan Act (SMLA) and Section 12 of the Consumer Discount Company Act (CDCA). Under Section 313(a)(5) of the MBBCEPA, the Department of Banking may take enforcement action against licensees who engage in “dishonest, fraudulent or illegal practices or conduct in any business or unfair or unethical practices or conduct in connection with the mortgage business.” Under Section 310(a) of the MBBCEPA, the Department may issue “rules and regulations and orders as may be necessary for the proper conduct of [licensee] business . . . .” Similarly, under Section 16(1) of the SMLA, the Department may issue “such general rules and regulations and orders as may be necessary for insuring the proper conduct of the business . . . .” Finally, since CDCA licensees may engage in the mortgage business under their CDCA license, under Section 12 of the CDCA, the Department may issue “such rules and regulations as may be necessary for the protection of the public [and] for insuring the proper conduct of the business contemplated by [the CDCA] . . . .” Pursuant to this statutory authority, the Department is in the process of developing Statements of Policy under each act for immediate issuance that list and define unethical or unfair practices that will be considered improper conduct for first and secondary mortgage loan businesses. This will provide an immediate response and guide the regulated industry regarding the business practices that will not be tolerated in Pennsylvania and allow the Department to more effectively protect Pennsylvania consumers through enforcement of the MBBCEPA, SMLA, and CDCA. Following the issuance of the Statements of Policy, the Department will promulgate regulations codifying the concepts contained in the Statements of Policy so that such concepts have the force and effect of law under each act. •
Develop a List of “Best Practices” for Mortgage Brokering, Lending and Servicing and Invite Voluntary Compliance by the Industry. The Department of Banking is in the process of formulating a list of what the Department views as “best practices” for the mortgage lending, brokering and serving industries. This list, which will be developed with input from industry representatives and consumer advocates, will appear in a Secretary’s Letter to all licensees and will be posted on the Department’s website. The letter will encourage voluntary compliance with these practices and state that those licensees that provide a letter to the Department stating their voluntary compliance with Losing the American Dream:
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these practices will have their names placed on a list on the Department’s website so that consumers can see which lenders adhere to these “best practices.” The Department has successfully employed a similar strategy with licensed check cashers regarding fees for government checks, which has resulted in voluntary compliance rate of approximately 85 percent. •
Continue to Emphasize Consumer Financial Education. The Commonwealth’s Office of Financial Education is currently housed within the Department and has been active in creating and fostering financial education programs for the citizens of the Commonwealth. This important investment in consumer financial education should continue to be financially and administratively supported by the Department so that the Commonwealth’s citizens can be better informed regarding personal finances. CONCEPTS FOR FURTHER STUDY AND DIALOGUE BY THE GENERAL ASSEMBLY • Pre‐Closing Credit Counseling for Consumers. The Department of Banking believes that, in addition to generalized financial education efforts, individual transactional counseling is essential in the subprime market. In most cases, if not all, by the time the foreclosure process starts, the homeowner is already in serious financial distress and has limited options. Therefore, the Department recommends that individualized transactional counseling for subprime borrowers prior to the purchase of the home be studied by the General Assembly. In transactional counseling, a counselor reviews the specific proposed transaction/loan and ensures that the consumer is fully informed of the associated risks. Most importantly, the counselor would examine the suitability of the loan and transaction for the consumer. Then, the homeowner can make an informed decision as to whether or not he/she should proceed. To implement a transactional‐
based counseling scheme, many issues need to be addressed and thoroughly reviewed. Some of these issues are set forth below. −
−
Timing. Ideally, counseling should occur before an agreement of sale is executed so as to prevent possible contract penalties if the consumer is unable to obtain appropriate financing. But, such an approach may be unrealistic given the fact that time is usually of the essence when purchasing a home. The other alternative is pre‐closing counseling. Here, the consumer would receive counseling prior to closing the loan and have the opportunity to refuse the loan without penalty if it is determined the loan terms and conditions are not suitable. Cost. Legislation would need to address reasonable counseling fees and payment. First time homebuyers in the subprime market may not have sufficient excess funds to pay for counseling. However, if the cost of counseling is paid through the loan, the counselor is presented with a conflict Losing the American Dream:
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of interest. Counselors may abuse their position by approving unsuitable loans in order to get paid. −
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Availability. Prior to requiring mandatory transactional counseling, research must be conducted to determine whether there exists a sufficient number of qualified counselors throughout the state to serve the subprime market. Associated with this issue is the manner of counseling. Determining whether face‐to‐face counseling should be required as opposed to counseling via phone or internet is key to deciding if there are sufficient counselors. Liability. Counselors or lenders may face added liability when recommending or funding subprime loans. Consumers may seek to hold counselors liable if the consumer believes that they were not properly advised. Furthermore, lenders may decide not to make any loans that a counselor recommended against for fear of being sued by the borrower if there is a default. −
Licensing. A comprehensive state licensing scheme may ameliorate concerns about counselor abuses; however, prior to proposing any licensing legislation, it must be established that there are a sufficient number of potential licensees to serve the subprime market. Any licensing scheme must have a fair balance between consumer and industry interests. •
Emergency Fund for Victims of Abusive Lending. Similar in concept to the Real Estate Recovery Fund established under Section 801 of the Real Estate Licensing and Registration Act and available to consumers under Section 317 of the MBBCEPA, this fund would provide compensation for victims of demonstrable abusive lending practices. In order to establish the fund, comprehensive legislation would be required detailing funding, administration, and the procedural structure for claims by consumers against the fund. •
Comprehensive Review of the Effectiveness of Chapter 5 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (Act 55). Consumer groups and publications such as the TRF Study have questioned Act 55’s effectiveness in protecting consumers in the subprime market. The Department of Banking is not aware of any research that quantifies the effectiveness of Act 55, and is therefore unable to comment on the overall effectiveness of Act 55 at this time. However, the Department does recognize the limitations of coverage under Act 55 due to the current fixed monetary cap and the applicability to home equity loans only. Therefore, in order promote a complete review of the effectiveness of Act 55’s consumer protections, the Department will lead a further dialogue with industry Losing the American Dream:
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and consumer groups and the General Assembly to address whether further consumer protections are required under Act 55. •
Comprehensive Review of the Mortgage Foreclosure Process in Pennsylvania. The Department of Banking is also aware of dissatisfaction with the mortgage foreclosure process in Pennsylvania, particularly the aspects of court rules regarding foreclosure actions, remedies available to borrowers in foreclosure, and attorney fees. These issues do not fall within the Department’s jurisdiction and are properly the jurisdiction of the judiciary and General Assembly. Therefore, the Department will lead a further dialogue with industry and consumer groups and the General Assembly concerning consumer protections in the foreclosure process and whether any changes should be recommended with regard to the court rules regarding foreclosure actions, remedies available to borrowers in foreclosure, and permissible attorney fees in foreclosure actions. •
Requirement for Disclosures on Recorded Mortgages Which Identify the Parties to the Origination of the Loan, i.e., the Mortgage Broker, Appraiser and Originating Lender. The Department of Banking will engage in a dialogue with all interested parties as to the concept of disclosing the parties to the origination of mortgage loans to consumers in recorded mortgage documents. This will enable the Commonwealth to better track foreclosure trends and the entities that have been involved in the origination of mortgage loans that ultimately end up in foreclosure. Losing the American Dream:
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A NOTE ABOUT FEDERAL PREEMPTION The United States has a “dual” banking system—meaning that both federal and state governments have some authority over specific types of financial institutions. Some laws apply equally to both federally and state chartered institutions and some do not. Until recent federal rules were put in place, states regulated mortgage subsidiaries of federal banks. Now, under federal law and regulation, all federally‐chartered banks and their subsidiaries are exempt from state licensing and consumer protection laws. Additionally, out‐of‐state state banks with branches in Pennsylvania may avail themselves of the same preemption afforded to national banks. Preemption also exists on a more limited scale for Pennsylvania and non‐
Pennsylvania‐chartered banks with regard to interest rates and lending terms under both state and federal interstate banking laws. Finally, under DIDMCA and the Parity Act, qualified non‐bank mortgage lenders may avail themselves of preemption of interest rates and certain fees on both fixed‐ and variable‐rate first mortgage loans, respectively. Given the current realities of the preemption landscape, the Pennsylvania Department of Banking recognizes that the recommendations proposed in this report will not apply to a significant portion of the state’s traditional mortgage industry. However, given the evolution of the mortgage marketplace, there are increasing numbers of players and activities—such as loan packaging by mortgage brokers—that should be regulated by the Department to protect consumers.
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APPENDIX A: H O U S E R E S O L U T I O N 364 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 PRINTERʹS NO. 2450 THE GENERAL ASSEMBLY OF PENNSYLVANIA HOUSE RESOLUTION No. 364 Session of 2003 INTRODUCED BY DALLY, LEWIS, SCAVELLO, BROWNE, REICHLEY, HARHART, BIRMELIN AND TIGUE, JULY 17, 2003 REFERRED TO COMMITTEE ON RULES, JULY 17, 2003 A RESOLUTION Urging the Secretary of Banking to study residential lending practices in Pennsylvania and to submit a report to the General Assembly. WHEREAS, The General Assembly has a compelling State interest in protecting its citizens from losing their homes through unscrupulous lending practices; and WHEREAS, In 2001 the General Assembly amended the Mortgage Bankers and Brokers and Consumer Equity Protection Act in order to establish principles of lending and define unlawful practices; and WHEREAS, The General Assembly has established a Homeownerʹs Emergency Mortgage Assistance Program to provide temporary financial assistance to those citizens in danger of losing their homes through foreclosure; and WHEREAS, This program can be overwhelmed by demand for financial assistance, necessitating infusion by the General Assembly of additional appropriations; and WHEREAS, The National Delinquency Survey performed by the Losing the American Dream:
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Mortgage Bankers Association of America found that while in the fourth quarter of 2002 only 0.79 percent of prime conventional loans in Pennsylvania were in foreclosure, more than 12 percent of subprime conventional loans were in foreclosure; and WHEREAS, This survey may give the first indication of an alarming trend which could affect more homeowners and jeopardize the financial solvency of the Homeownerʹs Emergency Mortgage Assistance Program; and WHEREAS, It is the responsibility of our State government to ensure that adequate information exists for public policymakers to evaluate the effectiveness of regulatory and financial assistance programs; therefore be it RESOLVED, That the House of Representatives urge the Secretary of Banking to conduct a study of residential lending practices in Pennsylvania, to identify trends in foreclosures and to document lending practices which are disadvantageous to Pennsylvania consumers; and be it further RESOLVED, That the Secretary of Banking be encouraged to provide recommendations, either legislative or administrative, in a written report to the Chief Clerk of the House of Representatives and the chair and minority chair of the Commerce Committee; and be it further RESOLVED, That the Secretary of Banking submit this report within one year. Losing the American Dream:
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APPPENDIX B: A N O V E R V I E W O F HEMAP The Pennsylvania Housing Finance Agency (PHFA) administers the Homeowner’s Emergency Mortgage Assistance Program (HEMAP) for the Commonwealth of Pennsylvania. Program requirements described below are prescribed by the HEMAP enabling legislation, Act 91, as amended, and the Agency’s Guidelines.66 LEGISLATIVE BACKGROUND HEMAP was enacted on Dec. 23, 1983, when Gov. Richard Thornburgh signed H.B. 500 into law, with broad support of the General Assembly, to create a program to assist Pennsylvanians affected by massive economic downturn and layoffs, particularly in the steel and related industries. The legislative intent was to provide protection through temporary mortgage assistance to homeowners facing foreclosure due to circumstances beyond their control.67 The original legislation allowed homeowners to have their mortgage arrearages brought current and to receive up to 36 months of ongoing monthly mortgage assistance. The program was amended by the General Assembly in 1992 (H.B. 2344) to make minor changes in program eligibility criteria. The Program Guidelines were amended by PHFA in 1994 to clarify who is or is not eligible for the program and also to make the Act 91 notice more explanatory.68 In 1998, Gov. Tom Ridge signed H.B. 1426 into law, making significant changes in HEMAP, designed to make it more self‐sufficient, thereby eliminating or reducing the need for regular state appropriations. It also increased mandatory repayments by program participants to the HEMAP fund and tightened the eligibility criteria, thus reducing the outlay of funds.69 FUNDING HISTORY Since its inception, HEMAP has received a total of $190,205,715 in state funding as follows:70 Fiscal Year Amount Fiscal Year Amount 1983‐84 $ ‐0‐ (a) 1994‐95 $18,500,000 1984‐85 $25,750,000 1995‐96 $18,000,000 1985‐86 $25,750.000 1996‐97 $3,000,000 1986‐87 $25,750.000 1997‐98 $10,000,000 1987‐88 $15,000,000 1998‐99 $ ‐0‐ 1988‐89 $11,700,000 1999‐2000 $ ‐0‐ 1989‐90 $10,000,000 2000‐01 $ ‐0‐ 1990‐91 $6,500,000 2001‐02 $ ‐0‐ 1991‐92 < returned $12,000,000 (b) 2002‐03 $ ‐0‐ 1992‐93 $ ‐0‐ 2003‐04 $6,710,715 (c) 1993‐94 $19,500,000 2004‐05 $6,045,000 (d) Losing the American Dream:
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From the beginning of the program through the end of December 2004, PHFA has loaned approximately $346 million to save 33,719 households from foreclosure. An amount in excess of $186 million has been repaid to the HEMAP fund by homeowners who have been helped by the program. A total of 15,409 HEMAP loans have been repaid in full. Funds received through loan repayments are recycled in the HEMAP fund, enabling HEMAP to pay out much more than has been appropriated because of loan repayments. The HEMAP legislation requires that HEMAP not be funded from general PHFA reserves and is dependent on sufficient current fund balances for continued program operation. If sufficient funding is not available, PHFA is required to publish an announcement of program suspension in The Pennsylvania Bulletin. The notice will allow lenders to stop sending the Act 91 notice and will shut down the program until adequate funding is restored. DISBURSEMENTS Disbursements from the HEMAP fund are not sent to the homeowner, but are sent directly to mortgagees, tax offices, etc. Disbursements are made to bring the respective account current and, if the homeowner is approved for a “continuing loan,” monthly disbursements are made for up to a maximum of 24 months of assistance (including arrearages). Since 1990, the following disbursements have been made on a calendar year basis.71 Losing the American Dream:
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REPAYMENTS HEMAP repayments rose steadily in the 1990’s going from $4.6 million in 1990 to $16.9 million in calendar year 1999. However, since 1999, repayments have become somewhat stagnant, averaging approximately $14 million per calendar year, as depicted on the following chart.72 HEMAP PROGRAM HEMAP provides temporary financial help to Pennsylvanians who are in threat of losing their homes in foreclosure. They must be at least 60 days delinquent in their mortgage payment due to financial difficulties, such as the loss of a job or other reduction in income, medical emergencies or other unforeseen circumstances. To qualify, applicants must meet a variety of requirements, the two primary ones being: • The mortgage delinquency must be due to circumstances beyond their control; and • There must be a reasonable likelihood that the applicant will be able to resume full mortgage payments within 24 months (which is the maximum term of assistance). NOTIFICATION The law requires that lenders provide notice, called an “Act 91” notice, to homeowners in Pennsylvania who are about to lose their home through foreclosure. The only mortgages exempted from this process are federally insured FHA loans and mortgages that are more than 24 months delinquent or with mortgage arrearages in excess of $60,000. The form of the Act 91 Notice is prescribed by PHFA.73 When a homeowner becomes at least 60 days late on his or her mortgage payments and a lender intends to foreclose, an Act 91 Notice must be sent to the homeowner. This notice informs homeowners of the extent of their mortgage delinquency and that HEMAP may provide assistance. The Notice provides them with the name, location, and telephone number of local counseling agencies where they can apply for HEMAP assistance and explains the application process. Losing the American Dream:
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APPLICATION AND REVIEW Homeowners have 30 days to contact a HEMAP‐certified counseling agency and arrange an appointment. The counseling agency is responsible for gathering and submitting the required applicant information to PHFA within 30 days of the initial appointment. When a timely application is filed, lenders are contacted and all foreclosure activity is temporarily stayed, until PHFA renders a decision on the application. DECISIONS Within 60 days of receiving the application from a counseling agency, PHFA must render a decision. It has two options: • Approval. Two kinds of mortgage assistance are available: − Lump sum payment (non‐continuing loan) – Homeowners who qualify under this provision are usually reemployed at the time PHFA reviews the application and can make their current monthly mortgage payments, but need assistance with arrearages only. − Lump sum payment with continuing assistance (continuing loan) ‐ These homeowners need help with arrearages as well as with making all or a portion of their ongoing monthly mortgage payments. The law requires a minimum monthly homeowner contribution of $25 per mortgage being assisted. In both instances: − Total mortgage assistance from HEMAP cannot exceed 24 months of mortgage payments (including arrearages.) − Outstanding arrearages owed to lenders are brought current, including any delinquent real estate taxes. Payments are made by PHFA directly to lenders/tax collectors on behalf of homeowners. − The amount disbursed by PHFA is secured by a mortgage lien on the applicant’s home. − The HEMAP mortgage must be in at least third lien position. − No more than two mortgages held by a homeowner can be assisted by PHFA. • Rejection. The lender and the homeowner are notified if the application for assistance is rejected and the foreclosure action may proceed.74 Losing the American Dream:
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LOAN REPAYMENT If assistance is provided, the HEMAP law requires a minimum repayment of $25 per month per loan assisted. Otherwise, the law does not require a regular amortized monthly payment (i.e. one that covers both principal and interest) until the homeowner’s housing expenses (mortgage[s], insurance, taxes, and utilities) drops below 40 percent of his net effective income (gross income minus taxes). Prior to 1998, this percentage was 35 percent. When this occurs, a repayment schedule is established and interest on the loan begins to accrue at nine percent. Program participants are required to be reviewed on an annual basis to determine ongoing eligibility for assistance or repayment status under the 40 percent test. 75 Losing the American Dream:
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APPENDIX C: DESCRIPTION OF THE FORECLOSURE PROCESS IN PENNSYLVANIA To understand the impact of foreclosure both on homeowners and lenders, it is important to understand the foreclosure process in Pennsylvania. The residential mortgage foreclosure process is governed by a combination of state law, rules of court, and local practices and procedures.76 PRIOR NOTICE Act 6. Before a residential mortgagee can institute a mortgage foreclosure action, notice must be given to the homeowner about the nature of the default, how to cure the default and the consequences of failing to do so. Act 6 of 197477 required the Department of Banking (Department) to promulgate a uniform notice that must be sent to all residential borrowers who become delinquent in their mortgage prior to foreclosure. The Notice (commonly called the “Act 6 Notice”) was promulgated by the Department and became effective on March 23, 1974, and appears at 10 Pa. Code § 7.4. The Act 6 Notice informs the homeowner of the nature of the default,78 how to cure the default, and how to contact the lender. The notice also explains the consequences of not curing the default, what other steps the homeowner can take to stop the foreclosure, and the earliest date that a sheriff sale could be held. The Notice must be sent at least 30 days prior to filing a foreclosure complaint, and no action can be taken against the homeowner during the 30‐day period. From Act 6 and the Act 6 Notice, the homeowner has the right to cure the default up to one hour prior to the sheriff sale.79 Prior to Act 6, a lender could technically accelerate the loan balance, and the homeowner would be unable to cure the default without paying off the entire loan balance. In addition to establishing a homeowner’s “right to cure” the mortgage default, Act 6 also contains other important consumer protections. It prohibits prepayment penalties,80 requires that only “reasonable attorney fees” can be charged in connection with a foreclosure action,81 and prohibits the use of confession of judgment in residential foreclosures.82 A major limitation of Act 6, however, is that it is limited in coverage to mortgage loans which are less than $50,000 a limit that has not been increased since 1974.83 Given the fact that the median value of an owner‐occupied home in Pennsylvania in 2000 was $97,000,84 the protections of Act 6 no longer cover the average homeowner in Pennsylvania. Act 91. As originally enacted in 1983, Act 91 required a new notice, in addition to the Act 6 notice, to be sent to all residential homeowners (regardless of the amount of the mortgage). The Act 91 Notice was designed to inform homeowners of the existence of HEMAP and the process for applying to PHFA for a loan to bring their delinquent mortgage(s) current. The Act 91 Losing the American Dream:
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Notice was to be sent when the homeowner was at least 60 days delinquent in the mortgage and contains information needed by the homeowner to apply for HEMAP. Originally, it was not clear whether the Act 6 Notice and the Act 91 Notice could be sent together, or had to be sent in separate envelopes.85 Most lenders, as a collection tactic, would send the Act 6 notice first at a point when the homeowner was at least 30 days delinquent and then followed up with the Act 91 Notice when the homeowner became 60 days delinquent. The 1998 legislation changed the notice requirements. First, it directed PHFA to revise the Act 91 Notice to make it a “Combined Notice,” which would also include the notice requirements of Act 6. Second, the law provided that the sending of the new Combined Act 91 Notice would be in lieu of any other notice required by law (i.e. the Act 6 Notice). In other words, a lender must now send only one notice, the new revised Combined Act 91 Notice, prior to instituting foreclosure proceedings. The new notice explains the HEMAP program and the rights of the homeowner to bring the mortgage current prior to foreclosure. Of course, mortgages that are ineligible for HEMAP assistance (i.e. FHA insured first mortgages)86 would continue to receive the old Act 6 Notice if the mortgages are under $50,000.87 If a homeowner applies to HEMAP in a timely fashion (i.e. within 33 days of the postmark date of the Act 91 Notice), the lender cannot foreclose on the homeowner until HEMAP makes a decision on the application. The counseling agency that takes the application must forward it within 30 days of when the application is first received, and HEMAP must make a decision within 60 days of receipt of application. If the homeowner does not apply for HEMAP or if the application is denied, the mortgagee is free to proceed with foreclosure. HUD Notice. Section 106(c)(5) of the Housing and Urban Development Act of 1968 (12 U.S.C. § 1701x(c)(5)) requires all HUD‐approved mortgagees to notify delinquent mortgagors of the availability of homeownership counseling provided by both the mortgagees and by nonprofit organizations which are approved by HUD. The provision applies to all mortgage loans on residential properties in the lender’s portfolio, whether conventional, governmentally insured, or governmentally guaranteed. JURISDICTION Court of Common Pleas. Generally, the Court of Common Pleas of the county in which the property is located is where the lender would file its mortgage foreclosure action. 88 Federal District Court. Holders of certain federally‐related mortgage loans, however, can choose to foreclose in federal district court instead of a local court of common pleas. Such loans would include those owned by Fannie Mae, Freddie Mac, and Rural Housing Services (formerly the Farmers Home Administration). Loans insured by federal agencies would still be foreclosed Losing the American Dream:
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on in state court and not federal court (i.e. those insured by HUD or the Veteran’s Administration). P L E A D I N G S A N D P R O C E S S 89 Complaint. A foreclosure action is started by the filing of a complaint. The complaint must be in writing and filed in the prothonotary’s office of the county, which is, the clerk of the civil division of the Court of Common Pleas. The complaint details the nature of the mortgage default (i.e. the amount of the mortgage payments that are outstanding at that point, plus any late charges,90 home inspection fees,91 title inspection fees92 and attorney fees.93 The complaint will usually also recite the fact that the requisite notice(s) have been sent (i.e. Act 6 Notice, Act 91 Notice, or combined notice, unless for some reason notice is not required). The complaint will also contain a copy of the legal description for the property, a copy of the mortgage, and the note. Service of the Complaint. The complaint must be personally served on all owners of the property (either by the sheriff of the county or some other independent process server). The sheriff has 30 days to serve the complaint. In the event the owners of the property cannot be found, then a reasonable investigation must be made to try and locate the homeowner(s). If the homeowner still cannot be found, then a motion must be presented to the court asking for “substituted service” of the complaint. Substituted service involves publishing notice in the local and legal paper of the fact that the foreclosure action has been filed, posting the property with a copy of the complaint, and/or sending a copy of the complaint by regular and certified mail to the last know address of the homeowner. This adds to the cost involved because of additional attorney fees and publication costs. Answer to Complaint. The complaint itself has on its face a notice that tells the defendant(s) that they have to file an answer to the complaint within 20 days of the date that the complaint is served upon them. In reality, the Pennsylvania Rules of Court require the plaintiff to provide the defendant with a “Ten‐day Notice” that gives the defendant an additional ten days to file an answer to the complaint before a default judgment can be entered against the defendant. A homeowner who is served with a foreclosure complaint is thus faced with two alternatives: 1) file an answer or some other type of responsive pleading94 within the 20 plus ten days provided, or 2) have a default judgment entered against the defendant(s). Default Judgment. The majority of foreclosure actions that are brought by lenders against residential homeowners in Pennsylvania result in a default judgment being entered against the homeowners. The primary reasons for this are that homeowners do not typically contest the fact that they are behind in their mortgage. Also, they usually do not have the financial ability to hire an attorney to represent them in those cases where they contest the amount that they are behind or the amounts that are being sought to be recovered (the fees being charged, etc.) in the foreclosure action. Losing the American Dream:
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Execution on Judgment/Scheduling Sheriff Sale. If an answer or other responsive pleading is not filed within the required timeframes, the lender will file a “Praecipe for Entry of a Default Judgment” in the foreclosure action and for the “Issuance of a Writ of Execution.” The prothonatory enters the default judgment and issues the writ. The writ is delivered to the sheriff’s office, and the sheriff’s office schedules the property for a sheriff sale. In the larger counties in Pennsylvania, sheriff sales are held on a monthly basis and usually will be scheduled for sale within 60‐90 days of when the property is listed. Some of the smaller counties, however, hold sheriff sales only every three or four months. Notice of the Sheriff Sale. In addition to posting the mortgaged premises with the notice of sale, each mortgagor and each junior lien holder must be served with the notice. Service of the notice must be completed no later than 30 days prior to the date of the sheriff sale. The notice of sale must also be advertised once a week for three consecutive weeks prior to the date of the sheriff sale in both a newspaper of general circulation and the legal newspaper for the county. The Sheriff’s Sale. On a typical sheriff sale day in the more populated counties, there are hundreds of properties listed for sale. Those in attendance represent a wide variety of people, some of whom are fully aware of the process and what will occur (i.e. courthouse personnel, attorneys representing the lenders, and experienced bidders) and some who have no understanding of the process, but who are there thinking that they can get a bargain‐priced home. Sometimes homeowners who are losing their home show up thinking there might be something they can do to save their home from foreclosure. The bidding will usually begin with the lender’s attorney bidding an amount equal to the sum of the sheriff’s costs and fees involved in the case. If there are no other bidders, than the lender will acquire title to the property for what appears to be only a nominal amount. In reality, the lender is already out the unpaid balance of its mortgage, accrued interest, late charges, escrow advances, attorney fees and costs, etc. and must attempt to recoup these amounts, plus the sheriff’s costs and fees, from a resale of the property. If there are one or more third party bidders attempting to acquire the property, the lender’s next bid will usually be for the full “upset price” of the property (i.e. an amount that will compensate the lender in full for the amount of the debt and all of its related costs and expenses). 95 This bid will usually be a surprise to the uninformed bidders, who mistakenly believe that they had a chance of acquiring the property for a nominal amount representing the sheriff’s costs and fees. Once the full “upset price” bid is made by the lender, bidding usually ends, unless the property is clearly worth more than the upset price, in which case bidding may continue among several third party bidders on an auction basis with the highest bidder acquiring the title. If the sale produces an amount which exceeds the upset price, sheriff’s costs and fees, municipal liens, taxes, etc., there may even be an amount left over that will be payable to the former homeowner. The Sheriff’s Deed. Upon completion of the sheriff sale, in most counties, the sheriff will prepare and record a deed, conveying the title to the purchaser, either the lender or a third party bidder. However, the process is far from uniform. In some counties, the sheriff prepares the deed and forwards it to the attorney who filed the foreclosure action for him or her to Losing the American Dream:
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record.96 Some counties ask the attorney on the writ to prepare the sheriff’s deed and deliver it to the sheriff’s office for the sheriff to record. In some counties it can take up to six months after the sheriff sale for the sheriff’s deed to be recorded. In the meantime, it is impossible for the lender to deed the property to a potential buyer.97 Removal from the Property (Ejectment). At the conclusion of the sheriff sale, in many cases, the home is still occupied by the mortgagor. In Pennsylvania this necessitates the filing of a new action in “Ejectment.”98 A complaint must be filed and served upon the defendant, which takes between 20‐30 days. The defendant has 20 days to file a response. If no response is filed, then the plaintiff must send a ten‐day notice to the defendant. If after ten days a response is not filed, then judgment may be entered for possession. A “Writ of Possession” is issued by the prothonotary and delivered to the sheriff. The sheriff has 30 days to serve the writ of possession on the defendant. After service of the writ, the occupants are given 20 days to vacate the premises. If the premises are still occupied after 20 days, the sheriff’s office is notified and a date is scheduled to have the occupants removed, which usually takes between 30‐90 days. On the day of eviction, the plaintiff must arrange to move the remaining belongings to storage and change the locks. THE LENGTH OF THE FORECLOSURE PROCESS Typical Timeline. To summarize, a sheriff sale in Pennsylvania in an uncontested foreclosure, where the homeowner offers no defense to the foreclosure action, does not file an application to HEMAP and does not file bankruptcy to stay the foreclosure, would take place between 253‐
401 days from the sending of the initial notice of default, as follows: • 90 days – The Act 91 Notice is sent when the homeowner is at least 60 days delinquent. Most lenders wait until the homeowner is at least three full months past due before they send the notice. (If it is an FHA loan or is otherwise ineligible for HEMAP assistance, the Act 6 Notice would be sent instead, which would reduce the timeframe to 60 days) • 33 days – The period of time that the homeowner has to meet with a counseling agency to file a HEMAP application. • 10‐15 days – If a timely application is not filed with PHFA for HEMAP assistance, the account is referred to a foreclosure attorney to prepare and file a complaint. • 30 days –Complaint filed and served upon defendant(s). • 30‐45 days – Defendant has an opportunity to file a responsive pleading, and if none is filed, a default judgment is entered. • 60‐90 days – The sheriff sale is scheduled. Losing the American Dream:
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POTENTIAL DELAYS IN THE PROCESS. HEMAP. If a homeowner applies to HEMAP for mortgage assistance, it can add 120 days to the foreclosure process. Once the homeowner has received the Act 91 Notice, they have 30 days to conduct a face‐to‐ face meeting with a consumer credit counseling agency to prepare an application for HEMAP. If the application is filed in a timely manner, the lender must stay all action against the homeowner until PHFA makes an initial decision on the application. The counseling agency has 30 days to acquire all of the requisite information and forward a complete application to PHFA. PHFA then has 60 days to make a decision on the application. If approved, HEMAP will bring the account(s) current. If denied, the lender is free to proceed with foreclosure. Response to the Complaint, Counter‐Claims, Preliminary Objections, etc. If the homeowner contests the foreclosure action by filing an answer to the complaint, preliminary objections to the complaint, or a counterclaim against the lender 99 this will significantly increase the time it will take to conclude the foreclosure. It will also add considerably to the attorney fees incurred by the lender to prosecute a “contested” foreclosure. As a practical matter, a contested foreclosure can add months or years to the foreclosure process. Petitions to Open Judgment, or other Pre or Post Sheriff Sale Petitions or Actions. In many cases, a homeowner will obtain legal counsel after the foreclosure judgment is entered against them or even later (i.e. after the sheriff sale has occurred). They do this by filing a motion with the court to open the foreclosure judgment in order to offer a defense to the proceeding. Perhaps the requisite notices were not provided, the complaint was not properly served, or some other defense could have been proffered, had the homeowner been represented by counsel. In any event, a motion is filed to open the judgment and undo the sheriff sale. Sometimes the matters raised in the motion are completely legitimate and the judgment should be opened and/or the sheriff sale undone. In other cases, the motion is filed to interject delay in the process. In either event, such a motion will add several months to the process, since an answer must be filed to the motion, a hearing will be scheduled, briefs filed, etc. As noted above, if the homeowner does not vacate the premises prior to the sheriff sale, a separate post‐sheriff sale action must be filed in ejectment to have the occupant evicted from the premises. An ejectment action will usually add at least four months to the process. Bankruptcy. The event most likely to delay the foreclosure process is the filing of one or more petitions in bankruptcy. In dealing with homeowners who are at risk of losing their home in foreclosure a common comment that they make is that once their home is scheduled for a sheriff sale and notice of that fact has been published, their mailboxes become filled with letters from attorneys who specialize in bankruptcy and say they have the solution to the homeowners’ problems. Unfortunately, homeowners are not Losing the American Dream:
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always counseled as to the full effect of bankruptcy and the fact that a secured lien, like a mortgage, will survive the bankruptcy. While the bankruptcy will delay a sheriff sale, it will not ultimately cure the homeowners’ problem, unless they are able to cure the mortgage arrearages in the bankruptcy. Lenders encounter some homeowners who file repeated bankruptcies in order to delay the inevitable sheriff sale. For example, a husband and wife own the property and an individual Chapter 7 bankruptcy is filed for the husband. Subsequently a Chapter 7 bankruptcy is filed for the wife. Then they also file a Chapter 13 bankruptcy, either individually or jointly. In too many cases, a feasible Chapter 13 plan is not possible, and the homeowners fall behind in their Plan payments and the Bankruptcy is dismissed. However, a few days before the next scheduled sheriff sale a new petition in bankruptcy is filed and the process is repeated. Eventually, the lender is able to get an order from the bankruptcy court barring the homeowner from filing any more bankruptcy petitions so the lender is able to complete the foreclosure. The use, and unfortunately abuse, of the bankruptcy process adds immensely to the delay in the foreclosure process. Continuing the Sheriff Sale. Sheriff’s sale may sometimes have to be continued to a later date. It could be that the homeowner reached a forbearance agreement with the lender, a motion is filed to open the judgment, or a bankruptcy is filed. Regardless of the reason, a foreclosure sale can be continued for up to 100 days without having to readvertise (and hence pay the additional advertising expense). Losing the American Dream:
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APPENDIX D: SOME LOCAL EFFORTS TO CURB ABUSIVE LENDING PRACTICES IN PENNSYLVANIA Despite the challenges, there have been several initiatives and actions by Commonwealth communities to curb abusive lending practices. Some state and federal actions are noted. They include: • Philadelphia Sheriff John D. Green’s Mortgage Foreclosure Moratorium. After record numbers of homes in Philadelphia were listed for foreclosure sales in early 2004, Sheriff John Green initiated a moratorium on all foreclosure sales for March 2004, the first time such action occurred in 20 years. Homeowners in Philadelphia, said Green, needed more time to try to save their properties, and he agreed to work with advocates from the Philadelphia Unemployment Project to help homeowners find assistance. It is not clear the action precipitated a change in the high number of foreclosures in Philadelphia, but it did increase public awareness of the problem. Although it was unclear what was causing the high numbers of foreclosures, an analysis by Community Legal Services found that about a third of the houses up for Sheriff’s sale in Philadelphia in March 2004 had questionable lending issues and most were subprime loans with higher interest rates and fees. Green’s office organized a 2003 task force to have both experts and activists identify barriers to borrowers in default to see if they were eligible for financial or legal assistance and help with mortgage foreclosure workouts. He also posted detailed information on his web site, http://www.phillysheriff.com, offering tips and options for homeowners in trouble and including a list and contact information for 22 HUD‐approved housing counselors in Philadelphia. Early in 2005, Green scheduled a series of four forums to seek input and develop strategies to help protect home equity for Philadelphians. The Philadelphia forums were open to homeowners, groups, or organizations interested in talking about the effects of predatory lending, how foreclosures impact property values, fraud and scams targeting homeowners, financial literacy and budget counseling, and investments in Sheriff’s sale properties. • Pittsburgh Anti‐Predatory Lending Initiative. The Anti‐Predatory Lending Initiative (APLI) was organized in 2002 by the Pittsburgh Community Reinvestment Group (PCRG), (http://www.pcrg.org), local political officials, and area financial institutions, to help define and publicize the root causes of predatory lending and the resulting foreclosure crisis in Allegheny County. PCRG is a coalition of 23 community organizations working on issues of community reinvestment and neighborhood development. PCRG has formed partnerships Losing the American Dream:
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with 15 local financial institutions, as well as Fannie Mae and the City of Pittsburgh, to drive capital resources to redeveloping neighborhoods. The APLI is a network of legal, financial, and consumer credit counseling agencies. The initiative works to both educate the public and help those victimized by abusive lending practices through direct lender negotiations. The initiative also conducts research and gathers information on mortgage lending activities. The APLI regularly holds financial literacy workshops for area residents and human service providers. The initiative has partnered with Fannie Mae to offer a conventional refinance product to pay off predatory loans and move homeowners back into high‐quality, low‐cost financing. Recent PCRG lending studies have defined a growing proportion of subprime lending and a decrease in market share of traditional lending institutions. A neighborhood study released by PCRG in April 2004, Disparities in Lending: A Study of Sub‐Prime Lenders in Pittsburgh and Allegheny County, found that the type of mortgage credit a borrower utilizes is largely impacted by his or her race and income. The study found that 49 percent of borrowers living in predominantly African American census tracts and 45 percent of borrowers living in low‐
income census tracts received mortgage financing through a subprime lender. •
Monroe County Foreclosure Study and Remediation Plan. Monroe County homeowners, many of whom moved from New York and New Jersey to purchase affordable housing, had complained of foul play in solicitation and lending practices that ultimately led to very high rates of foreclosures. In fall 2003, a state task force was appointed by Governor Edward G. Rendell and chaired by the Secretary of Banking to investigate the problem. In August 2004, the task force released its report, which included a detailed study of foreclosures in the area and a plan of action. (See http://www.banking.state.pa.us for more information.) A study by The Reinvestment Fund (“TRF”) confirmed an increased rate of mortgage foreclosure filings in Monroe County that outpaced housing development in the county and the rate of foreclosure filings across the state. The number of foreclosures tripled in Monroe County from 1995 through 2003. In 1995, 388 foreclosures were filed; by 2003, that number had increased to 940 filings. From 2000 to 2003, according to the TRF report, 2,745 families were faced with foreclosure filings, and an estimated 42 percent of them were forced to leave their homes. In response, the Commonwealth initiated a Monroe County action plan with three goals: to help families stay in their homes, to prosecute wrongdoers, and to prevent this situation from happening again. A new, toll‐free Monroe County Homeowners Helpline was set‐up, where homeowners could discuss their situation with caseworkers and work on a new negotiated mortgage agreement with their lenders. A second, more formal mediation process at which a panel of state officials reviews cases and recommends actions is underway. Other avenues of help Losing the American Dream:
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include free financial education counseling and access to educational forums, access to CareerLink services, and a partnership with the schools to offer financial literacy programs. Results include calls by more than 300 people to the Homeowners Helpline (1‐888‐4PA‐
0456). More than 70 cases have been resolved, and caseworkers have helped 17 families work out a deal with their lenders to help restructure mortgages. In fall 2004, eight homeowner forums, attended by more than 125 people, and seven free financial management workshops, attended by more than 130 people, were held in different locations throughout the county. Individual homeowners met with housing and financial management counseling agencies to find out information on budgeting, credit and debt, and delinquency counseling and pre‐purchase questions. The Department of Banking is aggressively pursuing leads and building cases to take administrative action in Monroe County. The Office of the Attorney General has filed three lawsuits seeking $21.4 million in restitution, penalties, and the Commonwealth’s costs from 46 builders/developers, mortgage brokers, and appraisers in connection with the complaints of 278 consumers. •
South Central Assembly for Effective Governance Predatory Lending Task Force. The South Central Assembly for Effective Governance, http://www.southcentralassembly.org, an eight‐county Central Pennsylvania regional nonprofit organization working with local governments to foster planned growth, first hosted a workshop on predatory lending in 2001, and followed up by convening a regional Task Force to study it. Task Force members included area banks, municipal community development officials, housing counseling agencies, housing and redevelopment authority staff, attorneys, human relations professionals, and others, including representatives of both the federal and state governments. In 2002, the Task Force set out to document the impact of subprime and predatory lending on foreclosure filings in Adams, Cumberland, Dauphin, Franklin, Lancaster, Lebanon, Perry, and York counties. It commissioned a study from the Association of Community Organizations for Reform Now (ACORN), a project of the American Institute for Social Justice. The 2003 release of the study found that predatory lending is a real and growing problem through the region, existing in urban, rural, and suburban communities. Foreclosure filings increased 112 percent, from 1,744 to 3,703 in the region from 1997 to 2002, and nearly half of the increase in foreclosure filings came from subprime lenders. Subprime lenders were found to make a larger share of loans to low and moderate‐income borrowers, and minorities were more likely to receive a loan from a subprime‐lender than whites. In addition, three out of four borrowers surveyed, or 71.4 percent, said that loan terms were different at closing than what they had been led to expect. Losing the American Dream:
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Actions taken by the Task Force to fight predatory lending include: the establishment of an Assembly Predatory Lending Solutions Hotline (1‐866‐551‐0239) for information and referrals; a public awareness campaign, including the distribution of posters and flyers; assistance to victims including referrals to counseling agencies and training of area attorneys and housing counselors; advocating for progressive anti‐predatory lending legislation at all levels; promoting ongoing research to better identify, map, and coordinate response to predatory lending; and providing public speakers and presentations to better inform service clubs, councils of churches and other local groups. •
•
Federal Fraud Charges in Predatory Lending Practices in the Lehigh Valley. The Community Action Committee of the Lehigh Valley (CACLV), http://www.caclv.org, began investigating problems in minority home sales in Allentown in the late 1990s. After failing to get action at any level of government, in 2001, CACLV was able to demonstrate to the Federal Bureau of Investigations and the United States Attorney, Eastern District, that the case was worthy of attention. By this time, U.S. Attorney Patrick Meehan, Eastern District of Pennsylvania, had established a special unit to investigate predatory lending practices such as mortgage and property flipping. This action resulted in: − The October 2004 filing of federal fraud charges alleging a former Allentown real estate broker and mortgage agent were involved in a predatory lending scheme and inaccurate property assessments that involved hundreds of Allentown properties and at least $1.5 million in sales. The scheme, said Meehan, involved properties bought and sold between 1998 and 2003 in Hispanic neighborhoods in downtown Allentown. The U.S. Attorney’s office is continuing its investigation and hopes to identify more individuals involved with the scheme, including appraisers. − A 24‐hour hotline, 1‐800‐755‐1563, run by CACLV with encouragement from U.S. Attorney Meehan’s office, for questions and complaints about home buying. It includes information in both English and Spanish and allows people to report deceptive tactics that they believe lenders are using to get them to sign mortgages they cannot afford. Bilingual counselors return calls, give advice on where to get help, and refer possible crimes to authorities to investigate. − CACLV hiring an attorney to represent the estimated 200 victims of predatory lending and work to try to refinance the mortgages with lenders. The attorney also works with families facing foreclosures to try to stop the foreclosure, if possible. Federal Civil Lawsuit Alleging Racketeering and Fraud in York County Development. Homeowners in the 200‐home Barwood Estates development in Dover Township were offered low‐cost loans through HUD and FHA. Many were problem loans, possibly forcing them into foreclosure. The developer, sales manager, settlement attorney, and loan officer who marketed the houses, pleaded guilty to conspiracy charges to defraud HUD and FHA in 2003. The lender, First Horizon Home Loan Corp., also filed a federal civil suit against the Losing the American Dream:
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developer and others in the case, alleging that the mortgages were issued for significantly more than the property was worth, and subsequently worked with other Barwood borrowers to reduce their mortgage balances by more than $1.3 million. According to HUD, more than 36 Barwood families lost their homes to foreclosure after paying up to $40,000 more than fair market value. The Housing Council of York and the South Central Assembly hosted a 2003 public meeting for Barwood residents to share stories about their concerns of struggling to pay high‐cost loans and losing their homes to foreclosure. Homeowners were referred to the Pennsylvania Human Relations Commission and the state Attorney General’s Bureau of Consumer Protection. An August 2004 civil lawsuit filed by a group of Barwood homeowners charged a developer, group of lenders, appraisers, closing agents, title agents, and an attorney with conspiring to defraud and, in some cases, racketeering. The goal of the lawsuit is to keep people from losing their homes and try to restore financial losses to those homeowners who were allegedly defrauded. •
Pennsylvania Human Relations Commission Order in Reverse Redlining Case in Philadelphia. The Pennsylvania Human Relations Commission (PHRC) recently held public hearings on complaints that homeowners were targeted for predatory loans because of their race. After investigations on a pattern and practice basis, the PHRC found that a Philadelphia licensed mortgage broker and his firm did target a group of African‐Americans based on their race and the racial composition of their neighborhood. In December 2004, the PHRC announced a combined award of $909,752 to the ten homeowners in the case. Reverse redlining is race‐based predatory lending, or the practice of extending credit on unfair terms to specific geographic areas due to the race of its residents. The PHRC reverse redlining finding, a violation of the federal Fair Housing Act, was the first time the application of this theory has been applied to a mortgage broker in both the Commonwealth and the U.S. The commission’s decision is available at http://www.phrc.state.pa.us, under the year 2004 and the case name, Taylor et al. v. McGlawn & McGlawn. The PHRC is continuing to discuss policy and guidelines on predatory lending and, in December 2004, invited various government agencies and community groups to address the commissioners about the organization’s concerns and/or best practices in the Philadelphia area. An assistant U.S. attorney from the Eastern District discussed that office’s decision to make fighting predatory lending a priority, and its goals of prosecution, education, and remediation. A housing advocacy organization representative talked about the proliferation of loans in the Philadelphia area with terms and conditions that would increase the likelihood of default by the homeowner and some key recommendations to prevent the spread of predatory lending, including increasing consumer protections in HOEPA, strengthening enforcement action, and heightening consumer education. Losing the American Dream:
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•
Formation of the Pennsylvania Coalition for Responsible Lending. A coalition of community and consumer groups from around the Commonwealth joined together in 2004 to advocate for the passage of a strong state consumer protection law to curtail the worst abusive lending practices in Pennsylvania. The Coalition is also interested in helping to reform other possible predatory financial services such as payday lending and refund anticipation loans. Losing the American Dream:
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APPENDIX E: C O R E C U R R I C U L U M E L E M E N T S F O R P R E ‐P U R C H A S E H O M E O W N E R S H I P E D U C A T I O N A N D C O U N S E L I N G 100 1. The Home‐Buying Process • The goal of home ownership and the importance of education • The benefits of home ownership • Pros and cons of owning and renting • Readiness for home ownership • Steps and time frame in the home‐buying process 2. Life‐Long Money Management • Spending styles and conditions of household’s finances • Importance of developing a budget • Availability and features of different types of credit • Importance of credit history • Costs and tax benefits of home ownership 3. Financing a Home • Products offered by the home mortgage industry • Nature of the financing process and key players • Understanding terminology and language of mortgage terms • How to select the right mortgage and how to shop for financing 4. Qualifying for a Mortgage • Qualifications in terms of capacity, capital, credit and collateral • Calculation of qualifying ratios • Understanding credit scoring and automated underwriting 5. Shopping for a Home • Legal aspects of home ownership and fair housing • Understanding the role of real estate professionals and real estate terminology • How to look for and select a home, including home inspections • How to make an offer, contingencies, and negotiations 6. The Loan Application Process • Applying for a mortgage • The process of approval • Loan denial Losing the American Dream:
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7. The Closing Process • Preparing for a closing, closing costs and documents • The role and selection of the closing agent 8. Life as a Home Owner • Financial planning for sustaining home ownership • Building, preserving, and accessing home equity • Income tax and real estate tax deductions 9. Getting to Know and Taking Care of a Home • Maintenance and inspection schedules • Do‐it‐yourself repairs • Dealing with contractors and tradespersons used for repairs and improvements • Energy conservation 10. How to Prevent Foreclosure • How to manage the household budget and prioritize debts • Proactive communications with lender/servicer • Resources for home owners in default (loss mitigation) • The foreclosure process Losing the American Dream:
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ENDNOTES According to the U.S. Census Bureau, the homeownership rate for the United States for the second quarter of 2004 was 69.2 percent. 1
On July 17, 2004, the North Carolina General Assembly created a Home Protection Pilot Program patterned after HEMAP. However, it is a much more limited program and only available to homeowners who have become unemployed. Session Law 2004‐124 (HB 1414, Part XX‐A). 2
HEMAP was created by the Act 91 of 1983 (P.L. 385). The provisions of the law can be found at 35 P.S. §§ 1680.103 and 1680.401c–410c. Administrative Guidelines for the program can be found at 12 Pa. Code § 31.201 et seq. 3
Application volume dipped slightly in 2003, when 8,944 applications were received. It is projected that 2004 will be at the same level as 2003. 4
While the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), two of the primary secondary market purchasers of mortgage loans, existed in 1983, they were still in their early stages of development. Fannie Mae was created by Congress in 1968 and Freddie Mac in 1970. 5
The subprime lending market is explained in more detail starting on page 13. 6
An adjustable rate mortgage is one where the interest rate is subject to periodic change based upon some standard market indicator such as the prime interest rate. 7
A balloon mortgage is one where the entire balance of the mortgage will come due at some point less than the full term of the mortgage (i.e. a loan that is amortized over a 30‐year term, with a 5‐year balloon). Hopefully, when the loan “balloons’ the homeowner will be able to refinance the loan on the same or better terms, but that is a function of the mortgage market and the borrower’s credit rating at the time. 8
Somewhere around 1990, PHFA decided to stop using marital discord as a reason for rejecting a HEMAP application, since in many cases it was clear that the applicant was not the cause of the marital disharmony and in other cases fault was impossible to determine. 9
According to the U.S. Census Bureau, Vital Statistics, Pennsylvania’s divorce rate has ranged from 3.2 percent to 3.4 percent since 1990. 10
“Getting Married Pays,” The Wall Street Journal (Feb. 12, 1999). This is an article by Dwight R. Lee and Richard B McKenzie, authors of “Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life,” Harper Business (1999). 11
The Federal Office of Child Support in the Preliminary Statistics for 2003, reports that $100 billion in accumulated unpaid support (up from $92 billion in 2002) is due to 18 million children in the United States. The child support agency collection rate was 50 percent, which is down from 68 percent in 2002. Although Pennsylvania’s enforcement rate for child support is one of the highest in the nation at 73 percent, concomitantly, in 27 percent of the cases, support is not being paid when due. 12
U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditures, 1997‐2002. 13
“Pennsylvania’s Property Taxes– Too High?” Issues PA (2002). The spiraling real estate tax problem was recently addressed in Pennsylvania with the passage of the Homeowner Tax Relief Act (Act 72 of 2004), signed into law on July 5, 2004. 14
According to the Energy Information Administration of the U.S. Department of Energy, residential heating costs are projected to average more than $1,000 this heating season, an increase of $133 to $270 over last winter. Heating oil users will experience the largest increase (28 percent), but natural gas and propane users will also see large increases as well, 15 percent and 21 percent, respectively. See www.eia.doe.gov. 15
35 P.S. § 1680.404c(a)(4) states that an applicant for HEMAP assistance must be suffering financial hardship due to circumstances beyond their control. 16
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Subprime lending is also referred to as “B‐C‐or D” lending or “non‐conforming” lending. On the other hand, credit to “prime” borrowers with good credit histories, is referred to as “A” credit. “A” mortgage loans are those that conform to the secondary market standards for purchase by the government sponsored entities (“GSEs”), Fannie Mae and Freddie Mac (although the GSEs have started to purchase or are considering purchasing “A minus” loans). 17
“Expanded Guidance for Subprime Lending Programs”, issued jointly by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of Thrift Supervision, Jan. 31, 2001. 18
FRBSF Economic Letter 2001‐38 (Dec. 28, 2001). http://www.frbsf.org/publications/economics/letter/2001/el2001‐38.html 19
“Subprime Markets, the Role of GSEs, and Risk‐Based Pricing”, Temkin, Johnson and Levy, prepared for the U.S. Department of Housing and Urban Development, Office of Policy Development and Research, March 2002. 20
U.S. Department of Housing and Urban Development/U.S. Department of the Treasury, “Curbing Predatory Home Mortgage Lending” (June 20, 2000, at 31) (the “HUD‐Treasury Report”). 21
United States Department of Housing and Urban Development, “Unequal Burden: Income and Racial Disparities in Subprime Lending in America” (April 2000); HUD‐Treasury Report, Ibid. note 21. 22
“Managing Your Money‐ Subprime Loan Market Grows Despite Troubles,” USA Today (December 7, 2004) http://www.usatoday.com/money/perfi/housing/2004‐12‐07‐subprime‐day‐2‐usat_x.htm 23
See Section 501 of DIDMCA (P.L. 96‐221, 12 U.S.C. § 1735f‐7a), which provides that “[t]he provisions of the constitution or the laws of any State expressly limiting the rate or amount of interest, discount points, finance charges, or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale, or advance” that is secured by a first lien on residential real property. 24
Title VIII of the Garn‐St. Germain Depository Institutions Act of 1982 (P.L. 97‐320, 12 U.S.C § 3801 et seq.). 25
National Mortgage News (May 19, 2001). 26
Mansfield, Cathy Lesser, “The Road to Subprime ‘Hell’ Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market,” 51 South Carolina Law Review 473 (Spring 2000). 27
For this and additional detailed information about HMDA and the requirements of Reg C see the Federal Financial Institutions Examination Council (FFIEC) website at www.ffiec.gov/hmda/. 28
On Feb. 2 and June 21, 2002, the Federal Reserve Board published changes to Reg C, which will make it possible for the first time to identify some loans as subprime rather than simply as loans made by subprime lenders. The changes include reporting the amount by which high interest rate loans exceed the market and identifying loans whose rates and/or fees make them subject to the Home Ownership and Equity Protection Act (HOEPA). However, these reporting requirements did not go into effect until Jan. 1, 2004 and HMDA data for 2004 will not become available until mid 2005. Reg C and the recent revisions are available at www.federalreserve.gov/regulations. 29
“Borrowing Trouble? IV: Subprime Mortgage Refinance Lending in Greater Boston, 2000‐2002,” Jim Campen, Mauricio Gaston Institute for Latino Community Development and Public Policy, University of Massachusetts/Boston, February 2004. 30
“Subprime Markets, the Role of GSEs, and Risk‐Based Pricing.,” U.S. Department of Housing and Urban Development, Office of Policy Development and Research, prepared by Kenneth Temkin, Jennifer E.H. Johnson and Diane Levy of the Urban Institute, March 2002. 31
For the complete HUD list of subprime lenders and manufactured housing lenders, go to http://www.huduser.org/datasets/manu.html. 32
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Studies by Fannie Mae and Freddie Mac, however, suggest that up to one‐third to one‐half of the subprime borrowers could have qualified for conventional loans. Freddie Mac, “Automated Underwriting: Making Mortgage Lending Simpler and Fairer for American Families” (September 1996); Fannie Mae Foundation, “Financial Services in Distressed Communities” (August 2001). 33
See, e.g., “Consumer Protection: Federal and State Agencies Face Challenges in Combating Predatory Lending,” Government Accounting Office (GAO‐04‐280 (January 2004). 34
Joint Center for Housing Studies, Harvard University “Credit, Capital and Communities: The Implications of the Changing Mortgage Banking Industry for Community Based Organizations” (March 9, 2004, at 33‐34). 35
See e.g. Testimony of Eric Stein, Senior Vice President, Center for Responsible Lending, before a Joint U.S. House Subcommittee Hearing entitled “Subprime Lending: Defining the Market and Its Customers” (March 30, 2004) (Eric Stein Testimony); ʺSubprime Foreclosures: The Smoking Gun of Predatory Lending?ʺ, Harold L. Bunce, Debbie Gruenstein, Christopher E. Herbert, and Randall M. Scheessele www.huduser.org/publications/pdf/brd/12Bunce.pdf ; “Predatory Lending in South Central Pennsylvania: A Review of Rising Foreclosure Filings and the Relationship to Predatory Lending,” prepared by ACORN Fair Housing for the South Central Assembly for Effective Governance (Dec. 3, 2003), available on the South Central Assembly’s website at www.southcentralassembly.org. 36
Eric Stein Testimony, ibid. note 36. 37
U.S. Department of Housing and Urban Development, “Unequal Burden: Income & Racial Disparities in Subprime Lending in America” (2000) at http://www.hud.gov/library/bookshelf18/pressrel/subprime.html 38
AARP “Subprime Mortgage Lending and Older Borrowers,” http//research.aarp.org/consume/dd57_lending.html. 39
See, e.g., Anastasia Hendrix, “Oakland Widow: They Stole My House,” S.F. Examiner (April 13, 1997, at A‐1); Kay Stewart & David Heath, “High‐Cost Loans Trap Those Least Able to Afford It,” Louisville Courier‐Journal (Feb. 16, 1997, at 16‐17). 40
See complaint filed in FTC v. Capital City Mortgage Corp., No 1:98‐CVV‐00237 (D.D.C), filed Jan. 29, 1998, and the Complaint filed in U.S. v. Long Beach Mortgage, Civ. No. 96‐61559DT (CWX) (C.D Cal.), filed Sept. 5, 1996. The Department of Justice announced a settlement with Long Beach shortly after filing the complaint addressing allegations that the company discriminated against the elderly, African‐Americans, Latinos, and women by charging higher rates than were offered to other similarly‐qualified borrowers. 41
See HUD‐Treasury Report, ibid. note 24; The Reinvestment Fund, “Predatory Lending: Developing an Approach to Identify and Understand Predatory Lending” (April 2001); Daniel S. Ehrenberg, “If the Loan Don’t Fit, Don’t Take It: Applying the Suitability Doctrine to the Mortgage Industry to Eliminate Predatory Lending,” 10 Journal of Affordable Housing & Community Development Law, 117 (Winter 2001); James H. Carr and Lopa Kolluri, “Predatory Lending: An Overview” (Fannie Mae Foundation 2001). 42
HUD‐Treasury Report, ibid. note 21, at 22. 43
HUD‐Treasury Report, ibid. note 21, at 21‐22; see also Fannie Mae and Freddie Mac studies that suggest that up to one‐third to one‐half of subprime borrowers could have qualified for conventional loans at conventional rates at note 70. 44
As described in more detail in the “Efforts to Curb Abusive Lending Practices” section , HOEPA requires additional disclosures that are triggered with respect to “high cost” loans. 45
Many of these abuses are detailed in the HUD‐Treasury Report at note 21, the Reinvestment Fund Study of Predatory Lending at note 42, and the South Central Assembly Study at note 36. 46
See, e.g., complaint filed in Newton v. United Consumer Finance Corp., Civ. No. 97‐CV‐5400 (E.D. Pa.), filed Sept. 2, 1997, which was a class action suit on behalf of low‐income borrowers who paid fees and charges of up to 50 percent of the cost of the home improvements; see also complaint filed in Harris v. Green Tree Financial Corp., Civ. No. 97‐CV‐1128 (E.D. Pa. ), filed Feb. 14, 1997, which was a class action suit challenging deceptive home 47
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improvement loan contracts; and Stuart L. Ditzen, “From Home Loans to Lawsuits,” Philadelphia Inquirer (Dec. 17, 1997, at B1). For a good discussion of prepayment penalties and their effect on borrowers, see the South Central Assembly Study at note 36. 48
John Farris and Christopher A. Richardson of the Center for Responsible Lending, “The Geography of Subprime Mortgage Prepayment Penalty Patterns,” Fannie Mae Foundation Housing Policy Debate, Volume 15, Issue 3 (2004). 49
67 Fed. Reg. 60542 (Sept. 26, 2002). 50
12 C.F.R. § 506.34 (prepayment penalty) and 12 C.F.R. § 560.33 (late charges). 51
See 41 P.S. § 405. See also the discussion of Act 6 in Appendix C. 52
HUD‐Treasury Report, ibid. note 21, at 96. 53
15 U.S.C. § 1602 (aa) et seq.; see also implementing regulations at 12 C.F.R. § 226.32, which amended Reg Z (Truth in Lending). 54
The Federal Reserve publishes yields on Treasury securities in a report called H‐15, which can be found at http://www.federalreserve.gov/releases/h15/. 55
HOEPA originally set the dollar amount at $400, but allows the Federal Reserve to adjust that figure annually based upon annual changes in the Consumer Price Index. 15 U.S.C. § 1602 (aa)(3) and 12 C.F.R. § 226.32(a)(1)(ii). On Aug. 16, 2004, the figure was set at $510 for 2005. 69 Fed. Reg. 50298 (Aug. 16, 2004). 56
John R. Wilke, “Justice, FTC, Probe Lenders, Allege Abuses,” The Wall Street Journal (Jan. 30, 1998, at A3). 57
Interagency Guidance on Subprime Lending, March 1, 1999. http://www.fdic.gov/news/press/1999/pr9908.html. 58
Ibid., p. 5. 59
Expanded Guidance for Subprime Lending Programs, Jan. 31, 2001, http://www.fdic.gov/news/news/press/2001/pr0901a.html. 60
See discussions of abusive lending practices beginning on page 19. 61
Ibid., pp. 10‐11. 62
63 P.S. §456.101 et seq. 63
For a complete description of the law, see E. Robert Levy, “Pennsylvania’s New Consumer Equity Protection Law Amending the Mortgage Bankers and Brokers Act and Other Amendments Pursuant to Senate Bill No. 377,” (July 2001) at http://www.mba‐pa.org/pdf/overview__new_law.pdf 64
Affected by this preemption provision was a Philadelphia City Council ordinance that had been approved on April 9, 2001. The Philadelphia ordinance labeled as “predatory” any residential mortgage loan under $150,000, which involved: fraudulent or deceptive acts or practices, loan flipping, balloon payments, negative amortization, excessive points and fees, increased interest upon default, prepayment penalties, mandatory arbitration, financing credit insurance premiums, lending without loan counseling, and lending without regard to ability to repay. See http://www.mbaa.org/state_update/2001/pa/phila_b0715final.pdf; see also, Michelle W. Lewis, “Perspectives on Predatory Lending: The Philadelphia Experience” Journal of Affordable Housing (Vol.12, No. 4, Summer 2003). A similar ordinance was introduced on April 17, 2001 in Pittsburgh City Council (http://www.mbaa.org/state_update/2001/pa/pitt_1676.doc) 65
The provisions of Act 91 can be found at 35 P.S. § 1680.401c et seq.; and the Guidelines at 12 Pa. Code § 31.201 et seq. 66
The Preamble to Act 91 provided as follows: 67
“(a) Findings.—The General Assembly finds that: Losing the American Dream:
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(1) The Commonwealth is in a severe recession and that the sharp downturn in economic activity has driven large numbers of workers into unemployment and has reduced the incomes of many others; (2) As a result of these adverse economic conditions, the capacity of many homeowners to continue to make mortgage payments has deteriorated and may further deteriorate in the months ahead, leading to the possibility of widespread mortgage foreclosures and distress sales of homes; (3) Many of these homeowners could retain their homes if they received temporary financial assistance until economic conditions improve; and (4) A program is needed to prevent similar emergencies in the future. (b) Purpose. – It is the purpose of this act to establish a program which will, through emergency mortgage assistance payments, prevent widespread mortgage foreclosures and distress sales of homes which result from default caused by circumstances beyond a homeowner’s control.” 24 Pa.B. 3224 (July 2, 1994). 68
Act 160 of 1998 (P.L. 364). 69
(a) The originating legislation did not contain an appropriation for HEMAP. The law originally devised a funding stream for HEMAP similar to the Neighborhood Assistance Program administered by the Department of Community and Economic Development. See 12 Pa. Code § 135.1 et seq. Only approximately $100,000 was donated in return for tax credits. (b) In Fiscal Year 1991‐92 the State withdrew $12 million from the HEMAP fund and required the fund to account on a current operating budget basis. (c) In Fiscal Year 2003‐4 HEMAP did not receive a General Fund appropriation, but it did receive $6,710,715 in TANF funds allocated by the Department of Welfare. (d) In Fiscal Year 2004‐5, HEMAP received a General Fund appropriation of $5,000,000 and additional TANF funds in the amount of $1,045,000. 70
Disbursements reached a high of $30.2 million in 1994, but had leveled off at approximately $18 million in the years 1996 ‐1998. Legislative changes enacted in 1998, which restricted the HEMAP loan amount to $60,000, reduced the months of assistance from 36 to 24 months, required the HEMAP loan to be in at least third lien position and limited the number of mortgages which could be assisted to no more than two, resulted in a gradual reduction in disbursements to a low of $11.5 million in 2001. Disbursements increased to $13.9 million in 2002 and $14.7 in 2003. Disbursements for 2004 increased dramatically to $21.7 million. 71
Repayments for 2004 amounted to $16 million, due in large part to a high level of payoffs and refinancing. 72
The Act 91 Notice is prescribed by the program guidelines, 12 Pa. Code § 31.203, and is set forth in Appendix A of the guidelines. 73
HEMAP has an appeal process required by law, which does not delay the foreclosure but affords homeowners an opportunity to clear up misunderstandings or provide new information. If overturned on appeal, an applicant may be awarded a HEMAP loan and the foreclosure may be halted. 74
The amount a homeowner must contribute monthly in the case of continuing assistance is governed by the same 40 percent test. 75
This will contain only a brief description. For a more thorough description including forms used in many of the various county offices in Pennsylvania see “Fundamentals of Mortgage Foreclosure,” published by the Pennsylvania Bar Institute (PBI No. 2003‐3468). 76
Known as the “Loan Interest and Protection Law,” Act 6 of 1974 (P.L. 13, 41 P.S. § 101 et seq.), hails back to a time when state law could establish loan interest rates for all lenders doing business within their jurisdiction. That scenario was dramatically changed in 1980 when Congress removed federal interest rate ceilings and preempted state usury laws on first lien mortgages with passage of DIDMCA (see 12 U.S.C. § 1735f‐7a). The Department of Banking still sets a maximum mortgage interest rate for residential mortgages, which is published on a monthly basis in the Pa. Bulletin (See, e.g., 35 Pa.B. 1344, where the maximum rate of interest was set at seven percent for March 2005). 77
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Most times there is a monetary default, however, other non‐monetary defaults are also possible. For example, the standard Uniform Fannie Mae/Freddie Mac Residential Mortgage Instrument also lists the storage of hazardous substances on the mortgaged premises as a breach of the mortgage. 78
41 P.S. § 404(a). 79
41 P.S. § 405. Prepayment penalties were fairly common in mortgages entered into during the 1980’s when mortgage interest rates rose to the 15‐18 percent range. Lenders expected rates to drop and consequently that the homeowner would refinance their mortgage rates when rates got to more acceptable levels. Prepayment penalties were designed to protect lenders from an early turnover of these loans and to make the loans more marketable on the secondary market. 80
41 P.S. § 406. However, the law did not define the term “reasonable,” except to say that prior to the filing of a foreclosure action or during the 30‐day stay of proceedings after the notice is sent the most that could be charged for attorney fees was the sum of $50. 81
41 P.S. § 407. Confession of Judgment was a practice that evolved from English common law whereby the mortgagor had preauthorized the mortgagee to enter (i.e. confess) judgment against the mortgagor in the event of a default without having to file a foreclosure action. 82
One of the changes made to the HEMAP legislation in 1998 was that the Act 91 Notice was to be redrafted by the Agency to include the disclosure requirements of Act 6. PHFA promulgated a new Act 91 Notice on June 5, 1999 (29 Pa.B. 2859). Since HEMAP is not limited as to the dollar amount of the mortgage, it appears that, at least as the notice requirement is concerned, the dollar amount of the mortgage is no longer limited. 83
U.S. Census Bureau. 84
This issue was later temporarily resolved with the 1994 amendments to the program guidelines (24 Pa.B. 3224). It required that the Act 6 Notice and the Act 91 Notice be sent in separate envelopes. 85
Mortgages insured by the Federal Housing Administration under Title II of the National Housing Act (12 U.S.C. § 1707‐1715z‐18) are ineligible for HEMAP assistance. 35 P.S. § 1680.401c(3). 86
FHA insured mortgages over $50,000 do not have to receive any legislatively prescribed notices. Most mortgage forms, however, do prescribe some sort of prior written notice to the mortgagee prior to foreclosure. 87
42 Pa.C.S. § 931 grants exclusive jurisdiction over actions in foreclosure to the Court of Common Pleas. 88
The Pennsylvania Rules of Civil Procedure govern the process and procedure for the filing of foreclosure actions. 89
Typically, the mortgage document provides that if a mortgage payment is not paid when due and within 15‐30 days of the due date, a late charge will accrue at a certain rate, usually five percent of the amount of the mortgage payment. 90
If a mortgage is owned by a federally related entity (i.e. Fannie Mae, Freddie Mac, or Rural Housing Services), such entities’ servicing guidelines require that the servicer of the mortgage must have the property inspected at a point in time when the mortgage is 60 days delinquent and must have a monthly inspection thereafter. The purpose of the inspection is to see if the property is still occupied and whether the property is being properly maintained. The cost of such inspection is borne by the homeowner. 91
Before a lender commences a mortgage foreclosure action, a title inspection must be performed to make sure that all owners of the property are included as defendants, and also to discover all of the lien holders on the property. All lien holders and other persons who may have an interest in the property must be notified of the eventual sheriff sale of the property. Pa.R.C.P. 3129.1 et seq. 92
Usually, the attorney fees set forth in the complaint are a percentage of the amount of the outstanding mortgage. The mortgage document will typically set attorney fees at five percent of the amount of the mortgage in the event the mortgage goes into default. In reality, however, this may or may not be the amount that the lender will pay the attorney for completing the foreclosure action. Usually, attorneys charge lenders a flat fee in the event the 93
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foreclosure is uncontested (i.e. an answer is not filed to the complaint; a default judgment is entered; and the case proceeds to sheriff sale without additional legal services needed to be rendered.). In a contested matter, the attorney will usually charge for services rendered on a per hour basis. A homeowner can file an answer to the complaint or preliminary objections to the complaint raising, for example, irregularities in the notices, service, etc. 94
If the property is not worth the amount that is needed to totally compensate the lender, many lenders will authorize their attorney to only bid up to the fair market value of the property or some percentage of it. That way the property gets sold to a third party and the lender receives an equivalent value of what it would have received had it purchased the property, incurred holding costs until the property could be resold, costs of resale, etc. As a rule, lenders do not want to own foreclosed properties because is usually results in further losses. It is almost always to the lender’s advantage if the property is sold to a third party bidder for a reasonable price. 95
The attorney representing the lender in the foreclosure action is usually called the attorney on the writ. 96
In some counties, it can also take up to six months following the sheriff sale of a property to a third party purchaser for the sheriff to forward the proceeds of the sale to the lender. 97
See Pa.R.C.P. 1051 et seq. 98
Counterclaims are usually not permissible unless they arise out of facts or circumstances arising out of the origination of the mortgage (see, e.g., Chrysler First Business Corporation v. Gourniak, 411 Superior Ct. 601 (1992)). However, many courts of common pleas will allow counterclaims to be litigated. 99
Adapted from Alan Mallach, “Home Ownership Education and Counseling: Issues in Research and Definition,” Federal Reserve Bank of Philadelphia, available at http://www.philadelphiafed.org/cca/capubs/homeowner.pdf 100
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the subprime mortgage market

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