Grassley Leads Criticism During Senate Hearing of DOJs Response to Home Loan Discrimination and Foreclosure Abuses

ABI Bankruptcy Brief | March 8, 2012

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March 8, 2012

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NEWS AND ANALYSIS

GRASSLEY LEADS CRITICISM DURING SENATE HEARING OF DOJ’S RESPONSE TO HOME LOAN DISCRIMINATION AND FORECLOSURE ABUSES

Sen. Chuck Grassley (R-Iowa) led a wave of criticism of the Justice Department's response to home loan discrimination and foreclosure abuses during a Senate Judiciary Committee hearing yesterday, asking government officials why there have been no criminal charges filed against top Wall Street banks, the Legal Times reported yesterday. Grassley said that "light" settlements, like the one reached in the Countrywide Financial discriminatory lending case, which averages a $1,700 payout per victim, do nothing to deter financial institutions from repeating illegal acts. "The department's message is crime does pay," Grassley said. "Light settlements and no prosecutions not only do not deter. They invite crimes of this sort to occur against similar future victims." When Grassley asked why settlements do not include the removal of executives who knew of illegal practices at the banks, Thomas Perez, assistant attorney general for DOJ's Civil Rights Division, replied that it was an idea the government would consider. Read more.

Click here to read the prepared hearing testimony.

COMMENTARY: WHY AN INCREASE IN FORECLOSURES IN 2012 COULD BE A GOOD SIGN

The number of foreclosures is expected to rise significantly in 2012, but some of these new defaults may be necessary medicine for the housing market to recover in the long term, according to a commentary in the Washington Post yesterday. They represent homes that have been backlogged in the courts and elsewhere that cannot be sold until they finish going through legal foreclosure proceedings, according to the commentary. Over the past year, delays in the foreclosure process have prevented a large number of distressed homes from going onto the market. While this is partly because of the recent crackdown on robo-signing and other abusive, illegal practices, it is also because states where foreclosures go through the courts — including Florida, New York and Maryland — have become backlogged, slowing down the process even further, according to the commentary. Partly as a result, about one million homes have begun but not finished foreclosure proceedings — a big chunk of the so-called "shadow inventory" that isn’t included in the official foreclosure count, according to analysis from Capital Economics, a Britain-based research firm. Read more.

REPORT: TARP BAILOUT ENCOURAGED BANKS TO MAKE RISKIER LOANS

While the Troubled Asset Relief Program (TARP) may have reduced incentives to take on risk for small banks, a new Federal Reserve study showed that it may have increased incentives to take on risk for large banks, according to AEI's The American magazine yesterday. The Fed's report found evidence that the TARP capital injection significantly increased the risk of loan originations by the large banks receiving the funds and significantly decreased the risk of loan originations by the small banks receiving the funds. Supporting evidence from interest spreads also indicates that the spreads on loans from large TARP recipients widened substantially following the TARP capital infusions. Read the full Federal Reserve report.

FEDERAL RESERVE: U.S. STATE, CITY DEBT DROPS FOR FIRST TIME SINCE 1996

U.S. state and local governments reduced their debts last year for the first time since 1996, according to Federal Reserve data showing the drop in borrowing that fueled a rally in the municipal-bond market, Bloomberg News reported today. Such debt dropped by almost 2 percent last year, the Fed said today in a quarterly report. The decline shrank the municipal debt market to $3.74 trillion by the end of December from $3.8 trillion a year earlier, the figures show. Click here to read the Federal Reserve's statistical release.

MOODY'S: CAUSES OF MUNICIPAL DEFAULTS COULD BE CHANGING

Moody's Investors Service reported yesterday that municipal bond defaults should remain rare, but the biggest risk could shift from defaults from health care and housing issuers to those from local governments themselves, according to Dow Jones Newswires. The ratings firm said in its report, "U.S. Municipal Bond Defaults and Recoveries 1970-2011," that no distinct pattern has emerged yet, but it is keeping an eye on a handful of recent bankruptcy filings and defaults by small cities that have sprung from "non-debt obligations," notably pension obligations to employees. "Unrated Prichard, Ala., was unable to pay its pension obligations; unrated Vallejo, Calif., will pay its pensions but not its appropriation-backed debt; and Central Falls, R.I., continues to pay its debt while renegotiating its pensions in bankruptcy court," Moody's said. "The combination of the Great Recession, tax and revenue shortfalls, and rising pension obligations are certainly creating new stress points that are common among many local governments." Read more.

COMMENTARY: STUCK IN ARBITRATION

A growing number of consumers and job-seekers discover, when something does go wrong, that they have unknowingly agreed to waive their right to file a lawsuit and must submit to arbitration, according to an op-ed in yesterday's New York Times. Because arbitration decisions are typically not disclosed and not subject to appeal, consumers and workers are left without recourse and must bear the cost of unfair, deceptive and harmful practices, according to the commentary. One 2008 study in the University of Michigan Journal of Law Reform examined employment and consumer contracts used by 21 major corporations and found mandatory arbitration clauses in 93 percent of the employment contracts and 77 percent of the consumer contracts. Congress has repeatedly failed to step in and fix this system, but the proposed Arbitration Fairness Act of 2011 would be a step in the right direction, according to the op-ed. The legislation would make predispute agreements to arbitrate consumer and employment disputes unenforceable. Read more.

DOJ ACKNOWLEDGES THAT CRIMINAL LIBOR PROBE OF BANKS IS UNDERWAY

The Justice Department acknowledged that it is conducting a criminal investigation into suspected manipulation of benchmark interest rates, Bloomberg News reported yesterday. The Feb. 27 letter to U.S. District Judge Naomi Reice Buchwald in Manhattan was made public yesterday and is the first public acknowledgment by the Justice Department of the criminal investigation of benchmark lending rates such as the London interbank offered rate (LIBOR). Judge Buchwald cited the letter at a March 1 hearing in which she denied a request for documents related to the investigation by investors suing Credit Suisse Group AG (CSGN), Bank of America Corp. and other companies over claims that they artificially suppressed LIBOR. Judge Buchwald is presiding over multidistrict litigation involving 21 class-action, or group, lawsuits against banks accused of conspiring to artificially suppress LIBOR by understating their borrowing costs to the British Bankers' Association. Read more.

ABI IN-DEPTH

LATEST CASE SUMMARY ON VOLO: MICHIGAN DEPT. OF TREASURY V. HIGHT (IN RE HIGHT; 6TH CIR.)

Summarized by Dean Langdon of DelCotto Law Group PLLC

In affirming the rulings of the courts below overruling the objection of the Michigan Department of Treasury to the debtor's protective claim, the Sixth Circuit Court of Appeals held that the debtor's claim for 2008 taxes qualifed as a pre-petition claim under Code Sections 502(i) and 507(a)(8). Thus, the debtor properly filed the claim under Code Section 501(c). The Court held that while the language of Code Section 1305(a) only allowed creditors (not debtors) to file postpetition claims, its language was permissive rather than restrictive. The court recognized that to qualify as for treatment as a pre-petition claim (and payment through the chapter 13 plan), the claim filed by the debtor must fall within the exception of Code Section 502(i) for income taxes that arise after commencement of a case. The court determined that the claim fell within the scope of Code Section 507(a)(8)(A)(i) and (iii) and could therefore be treated as a prepetition claim under Code Section 501(i). Finally, the court tied the circumstances back to the debtor's ability to file a claim under Code Section 501(c) in reliance on the definition of a "creditor" in Code Section 101(10), which specifically includes claims described in Code Section 502(i).

More than 400 appellate opinions are summarized on Volo. Click here regularly to view the latest case summaries on ABI’s Volo website.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: REFI BOOM LOOMS AS MORTGAGE RATES HOLD STEADY

The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent post examines how the government’s recent policy announcements will encourage more refinancing activity, and that mortgage rates are cooperating by holding steady.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll
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